The Effects of Corporate Board Characteristics on Loan Monitoring Decisions

Motivated by a paucity of research into the impact of corporate governance from a debtholder perspective, we examine the impact of corporate governance on loan monitoring decisions. The active and close involvement of a major UK bank facilitated the development of extremely realistic experimental scenarios with a great deal of accurate institutional detail. The results show that the likelihood of loan officers increasing the level of monitoring in the context of a debt covenant breach is associated with board independence, director financial expertise and the presence of a blockholder. A two-way interaction between financial expertise and board independence is also documented. Since likelihood of debt covenant breaches continues to be an important variable in studies of accounting choice and corporate finance the paper provides insights into as