Creditor Control Rights and Board Independence

Ferreira, Daniel; Ferreira, Miguel A.; Mariano, Beatriz

doi:10.1111/jofi.12692

Cited by 96 publications

(35 citation statements)

References 42 publications

(75 reference statements)

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“…When a firm runs into difficulties, it is common to bring in more IDs. Recent research suggests that this often occurs after covenant violations that allow creditors to force the addition of more IDs (see e.g., Ferreira et al, 2017). When a firm is doing well for a number of years, it is also common to add non-IDs since successful CEOs have more influence over nominations and boards want to retain these CEOs.…”

Section: Methodological Challenges In Undertaking Governance Researchmentioning

confidence: 99%

A Survey of Recent Evidence on Boards of Directors and CEO Incentives

Masulis

2020

Asia-Pac J of Fin Stud

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This article surveys the recent literature on boards of directors and the interplay between director incentives and CEO incentives. The primary focus is on how the incentives and other characteristics of directors, boards, and CEOs interact to affect firm performance. The article reviews the recent evidence documenting a causal relationship between board independence and measures of firm performance. It also discusses the major limitations of the current measure of director independence. Finally, the article highlights how board independence provides strong incentives for CEOs to create firm value and examines the recent evidence on what other director characteristics improve board effectiveness.

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Section: Methodological Challenges In Undertaking Governance Researchmentioning

confidence: 99%

A Survey of Recent Evidence on Boards of Directors and CEO Incentives

Masulis

2020

Asia-Pac J of Fin Stud

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“…Creditors impose these changes via behind-the-scenes negotiation and contractual tightening. Ferreira, Ferreira, and Mariano (2017) provide evidence of behind-the-scenes negotiation by showing that most new independent directors added after a violation have links to creditors. Becher, Griffin, and Nini (2018) provide empirical support for the contractual channel by showing that creditors tighten acquisition restrictions after a violation.…”

Section: Covenant Violationsmentioning

confidence: 96%

Losing Control: The 20-Year Decline in Loan Covenant Restrictions

2018

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Over the last twenty years, financial covenants in syndicated loan agreements have steadily become looser. The result is that the fraction of U.S. public companies reporting a violation of a loan covenant during a given year decreased from over 12% in 1997 to less than 5% in 2016. Although the decline accelerates in recent years, the trend is present prior to the recent financial crisis. The trend cannot be explained by changes in the composition of public firms, a decrease in the usage of debt, or a long series of positive ex-post outcomes for firms. Nor does the rise in institutional lenders or an increased supply of credit entirely explain the decline. The loosening of covenants is widespread among all types of borrowers and loans and accompanies an increase in loan spreads over the period, suggesting that the trend reflects fundamental changes in the costs and benefits of tight covenants. * We thank seminar participants at the Washington University Conference on Corporate Finance and the Philly Five conference and Larry Halperin for helpful comments.

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“…Nevertheless, Kroszner and Strahan (2001) and Güner, Malmendier, and Tate (2008) find evidence of conflicts of interest between board directors appointed by creditors and shareholders. For example, Ferreira, Ferreira, and Mariano (2017) find an increase in bankers' representation on corporate boards following the violations in loan covenants. Given that CDS initiation could be followed by reduced lender interest in monitoring the company, but heightened shareholder interest (Kim et al 2017), we expect the opposite of trends documented in Ferreira et al (2017), that is, a shift in board of directors towards shareholder interest, all else held equal.…”

Section: Corporate Governancementioning

confidence: 99%

Heightened Shareholder Interest in Firm Affairs Following the Inception of Credit Default Swap Trade

2017

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The literature shows that a lender reduces its monitoring of client activities and decreases the accommodation it offers to a distressed client after the lender receives insurance on its outstanding client debt via a credit default swap (CDS). These changes in lender behavior can exacerbate downside risk but can also create upside potential for the reference firm's shareholders. We predict that the firm's shareholders, being the residual claimholders, would then increase their interest in firm affairs, by demanding improved corporate governance and the quality of financial reports. We find an increase in independence of the board of directors and a decline in the dual position of chief executive officer and board chairman following the onset of CDS trading. We also find higher earnings response coefficient and trading volumes around the earnings announcement dates and lower post-earnings announcement drift. Overall, our results suggest that shareholders demand and obtain higher quality of, or pay greater attention to, financial reports in the years following the onset of CDS trading.

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Creditor Control Rights and Board Independence

Cited by 96 publications

References 42 publications

A Survey of Recent Evidence on Boards of Directors and CEO Incentives

A Survey of Recent Evidence on Boards of Directors and CEO Incentives

Losing Control: The 20-Year Decline in Loan Covenant Restrictions

Heightened Shareholder Interest in Firm Affairs Following the Inception of Credit Default Swap Trade

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