Board corruption and loan contracts

Robin Chen, Chia Wei Huang, Chih Yung Lin*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

In this study, we examine the effects of board corruption on the financing costs of firms. We construct an index of perceived corruption that uses the average level of corruption that is linked to a director's surname. The evidence shows that lending banks attach higher spreads and stricter covenants to the loan contracts of firms with high perceived board corruption. Specifically, when the perceived board corruption increases after mergers and acquisitions, firms are charged higher loan spreads. Further analysis shows that the effects of board corruption on financing costs become stronger when firms have weak governance mechanisms. These results show that banks recognize board corruption as a source of agency problem with borrowers when they make lending decisions.

Original languageEnglish
Pages (from-to)1929-1956
Number of pages28
JournalJournal of Business Finance and Accounting
Volume49
Issue number9-10
DOIs
StatePublished - 1 Oct 2022

Keywords

  • agency problem
  • bank loan spread
  • board corruption
  • corporate governance
  • financing cost

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