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Bank dependency and banker directors

Karlyn Mitchell

Managerial Finance, 2015, vol. 41, issue 8, 825-844

Abstract: Purpose - – Directors play a hard-to-quantify but critical role in the success of corporations. Outside directors supplement the firm-specific knowledge of inside directors by providing expertise and monitoring. Prior research finds that outside directors who are commercial bankers can be both beneficial and costly to large, non-financial corporations. Smaller, bank-dependent corporations should benefit more than large firms from the services banker directors provide, but may also be more prone to the costs they can impose. The purpose of this paper is to investigate the influence of bank dependency on appointments of banker directors. Design/methodology/approach - – The author estimates models relating the probability of a first-time banker-director appointment to proxies of bank dependency on data for a matched sample of firms with and without banker directors drawn from a size-representative sample of Compustat firms. Findings - – Bank-dependent firms are less likely to appoint bankers as directors than bank-independent firms. Bank-dependent firms are also less likely to appoint bankers whose employers are firms’ creditors (i.e. affiliated bankers). Bank-dependent and bank-independent firms are indistinguishable in their probabilities of appointing unaffiliated bankers as directors. Practical implications - – Bank-dependent firms with unexploited growth opportunities appear unable to ameliorate their financial constraints by having banker directors. Appointing retired bankers to boards may give firms the benefits of banker directors without the costs. Originality/value - – This paper is the first to: document the prevalence of banker directors at smaller corporations; present econometric evidence on banker-director appointments at firms ranging from small to large; and identify bank dependency as a factor limiting appointments of affiliated banker directors.

Keywords: Corporate governance; Boards of directors; Bank lending relationships; Financial constraints; Hold-up problem; Outside directors (search for similar items in EconPapers)
Date: 2015
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