Bankruptcy, overlapping directors, and bank loan pricing

In-Mu HAW, Byron Y. SONG, Weiqiang TAN, Wenming WANG

Research output: Contribution to journalArticlespeer-review

Abstract

Using a sample of loan facilities borrowed by firms that share directors with bankrupt firms, this study investigates whether the overlapping directors are a transmission channel of the bankruptcy contagion effect in the bank loan market and, if so, what the underlying mechanism is. We find that firms are charged higher loan spreads in the period following the bankruptcy filing of a firm with a common director and that overlapping directors are a relevant channel for the bankruptcy contagion effect, in addition to other channels identified in literature. We also find that the negative contagion effect on loan pricing is most likely driven by the overlapping directors' reputation loss due to their involvement in bankruptcy events, and not by competing hypotheses, such as director distraction and director career concern/experience. Further analyses reveal that the adverse contagion impact on loan spreads is more pronounced when overlapping directors have greater influence over corporate policies or when their reputation is more seriously damaged. Meanwhile, the contagion effect is mitigated when interlocked firms have a higher-quality board. These results further support our evidence of the director reputation loss hypothesis. We strengthen the identification strategy to establish causality. In sum, our study identifies common directors as a channel of bankruptcy contagion effects on loan pricing and director reputation loss as an underlying mechanism. Copyright © 2021 Elsevier B.V. All rights reserved.
Original languageEnglish
Article number102097
JournalJournal of Corporate Finance
Volume71
Early online dateSep 2021
DOIs
Publication statusPublished - Dec 2021

Citation

Haw, I.-M., Song, B. Y., Tan, W., & Wang, W. (2021). Bankruptcy, overlapping directors, and bank loan pricing. Journal of Corporate Finance, 71. Retrieved from https://doi.org/10.1016/j.jcorpfin.2021.102097

Fingerprint

Dive into the research topics of 'Bankruptcy, overlapping directors, and bank loan pricing'. Together they form a unique fingerprint.