Bank power, block ownership, boards and financial distress likelihood: An investigation of Spanish listed firms

Musa Mangena, Alba Maria Priego and Montserrat Manzaneque

Journal of Corporate Finance, 2020, vol. 64, issue C

Abstract: We investigate the effects of bank power, block ownership and board independence on the likelihood of financial distress. Using a matched sample design, we find that firms in which banks have power are more likely than their counterparts to enter financial distress. However, the bank power effects are moderated by block ownership and board independence. Specifically, on the one hand, financial distress due to bank power is lower for firms with greater ownership by pressure resistant blockholders and such blockholders appear to be the largest blockholder in the firm. The bank power effects are also lower in firms with greater outside directors and this appears to be primarily driven by proprietary directors than independent directors. On the other, we document evidence suggesting that the bank power effects are magnified for firms in which the board chair is a proprietary director aligned to non-financial blockholders or CEO/Chair, suggesting that banks might partly influence decisions via board chairs. Overall, the findings are consistent with bank power actions being detrimental to the firm, but the extent to which such actions harm the firm depends on the monitoring intentions of blockholders and/or board of directors. These findings have important implications for policymakers.

Keywords: Corporate governance; Bank power; Board independence; Block ownership; Financial distress likelihood (search for similar items in EconPapers)
JEL-codes: G30 G32 G33 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:64:y:2020:i:c:s0929119920300808

DOI: 10.1016/j.jcorpfin.2020.101636

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