Corporate governance and restrictions in debt contracts
|Speaker:||Irem Tuna, Cass Business School|
|Date:||Wednesday 23 February 2011|
|Location:||Xfi conference room|
We investigate the role of corporate governance on the presence of restrictions in debt contracts using a broad array of corporate governance proxies. Corporate governance mechanisms are in place to align the interests of equity holders and managers but they can also monitor and enforce debt contracts and improve the provision of credit relevant accounting information. If corporate governance provides such debt holder benefits, we expect lenders to demand fewer restrictions in debt contracts when corporate governance mechanisms are strong. Using a large sample of public bond and syndicated loan contracts and exploratory Principal Component Analysis to extract indicators for the quality of board and shareholder governance, we find that the restrictiveness of debt contracts is negatively associated with board size, independence and expertise. In addition, we find that the number of restrictions is positively associated with block holder governance in public bond contracts but not in syndicated bank loan contracts. This latter result suggests that banks use alternative private monitoring mechanisms to limit the wealth expropriation associated with block holder power.