Do Banks Price Independent Directors’ Attention?

Henry He Huang, Gerald J. Lobo, Chong Wang and Jian Zhou

Journal of Financial and Quantitative Analysis, 2018, vol. 53, issue 4, 1755-1780

Abstract: Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.

Date: 2018
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