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

Randall S. Kroszner and Philip E. Strahan

No 7319, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 1999-08
New Economics Papers: this item is included in nep-fin, nep-mon and nep-pke
Note: CF IO LE ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Kroszner, Randall S. & Strahan, Philip E., 2001. "Bankers on boards: *1: monitoring, conflicts of interest, and lender liability," Journal of Financial Economics, Elsevier, vol. 62(3), pages 415-452, December.

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