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Bankers on Boards: Monitoring, Conflicts of Interest, and Lender Liability

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  • Randall S. Kroszner
  • Philip E. Strahan

Abstract

This paper investigates what factors determine whether a commercial banker is on the board of a non-financial firm. We consider the tradeoff between the benefits of direct bank monitoring to the firm and the costs of active bank involvement in firm management. Given the different payoff structures to debt and equity, lenders and shareholders may have conflicting interests in running the firm. In addition, the U.S. legal doctrines of 'equitable subordination' and 'lender liability' could generate high costs for banks which have a representative on the board of a client firm that experiences financial distress. Consistent with high potential costs of active bank involvement, we find that bankers tend to be represented on the boards of large stable firms with high proportions of tangible ('collateralizable') assets and low reliance on short-term financing. The protection of shareholder versus creditor rights under the U.S. bankruptcy doctrines may reduce the role that banks play in corporate governance and the management of financial distress, in contrast to Germany and Japan. We conclude with implications for the current bank regulatory reform debate, such as whether to permit banks to own equity in non-financial firms that, in turn, could allow them to mitigate the conflict.

Suggested Citation

  • Randall S. Kroszner & Philip E. Strahan, 1999. "Bankers on Boards: Monitoring, Conflicts of Interest, and Lender Liability," NBER Working Papers 7319, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7319
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    References listed on IDEAS

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    Cited by:

    1. Winfried Ruigrok & Simon I. Peck & Hansueli Keller, 2006. "Board Characteristics and Involvement in Strategic Decision Making: Evidence from Swiss Companies," Journal of Management Studies, Wiley Blackwell, vol. 43(5), pages 1201-1226, July.
    2. David Levinson & Reinaldo Garcia & Kathy Carlson, 2001. "A Framework for Assessing Public Private Partnerships," Working Papers 200712, University of Minnesota: Nexus Research Group.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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