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Do Banks Price Independent Directors’ Attention?

  • Henry He Huang, Gerald J. Lobo, Chong Wang and Jian Zhou

Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.

Corresponding author
* Huang (corresponding author),, Yeshiva University Sy Syms School of Business; Lobo,, University of Houston Bauer College of Business; Wang,, The Hong Kong Polytechnic University School of Accounting and Finance; Zhou,, University of Hawaii at Manoa Shidler College of Business.
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We thank Paul Malatesta (the editor) and Ronald Masulis (associate editor and referee) for their many insightful and constructive suggestions. We thank Juan Qin for excellent research assistance and Miao Hu, Dengshi Huang, Joe Kerstein, Victor Wei Huang, Zhonggao Lin, Qianqiu Liu, Ghon Rhee, Tiesheng Zhang, Jun Zheng, Hongquan Zhu, Jia-nan Zhou, and the workshop participants at Anhui University of Technology, Southwest Jiaotong University, University of Hawaii at Manoa, and University of Kentucky for their helpful comments. Wang acknowledges the financial support from The Hong Kong Polytechnic University Start-Up Fund and the National Natural Science Foundation of China (Fund #71332008). Zhou gratefully acknowledges the research support from Lloyd Fujie / Deloitte Foundation Professorship and the summer research support from the Shidler College of Business at the University of Hawaii at Manoa.

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