Bondholder representatives on bank boards: A device for market discipline

Isabelle Distinguin, Laetitia Lepetit, Frank Strobel and Phan Huy Hieu Tran
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Isabelle Distinguin: UNILIM - Université de Limoges, LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges
Laetitia Lepetit: UNILIM - Université de Limoges, LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges

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Abstract: We examine whether board representation of bondholders can be an effective market discipline mechanism to reduce bank risk, using a unique dataset combining information on bondholders and boards of directors of European listed banks. Our results show that the influence of bondholder representatives on the bank board significantly reduces bank risk without impacting profitability. The beneficial effect of this market discipline mechanism is stronger when bondholder representatives have regulatory experience, current or long relationships with their affiliated bondholders, and for more complex banks. In contrast, the reducing impact on bank risk is smaller for banks with lower capitalization levels.

Date: 2023-02-10
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Published in Economic Inquiry, 2023, 61 (3), pp.738-765. ⟨10.1111/ecin.13137⟩

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Journal Article: Bondholder representatives on bank boards: A device for market discipline (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04678217

DOI: 10.1111/ecin.13137

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