Intra‐industry bankruptcy contagion: Evidence from the pricing of industry recovery rates

How does bankruptcy contagion propagate among industry peers? We study the debt recovery channel of industry contagion by examining whether the cost of a company's debt is affected by the observed recovery rates of its bankrupt industry peers. Our results show that lower industry recovery rates are associated with higher loan spreads, but only when the contracts were originated during industry bankruptcy waves. Consistent with the debt recovery channel of industry contagion, we find that the negative effects of industry recovery rates are significantly stronger under situations where the effect is expected to be more salient.     

Corporate social responsibility,credit rating,and private debt contracting: new evidence from syndicated loan market

We examine the impact of corporate social responsibility (CSR) activities on loan spreads of syndicated bank loans, with a particular interest in how CSR and credit ratings are interrelated as a joint determinant of loan spreads. Focusing on private debt contracts, we show that both CSR strengths and concerns are related to their loan spreads. CSR strengths work to lower firm risk, hence reducing the loan spread, whereas CSR concerns increase firm risk, thus increasing the loan spread. Once we include detailed credit rating information in the models, however, CSR concerns lose significance, but CSR strengths remain significantly related to the loan spread. We also find that both CSR strengths and CSR concerns are related to loan spread for non-rated firms, but the CSR concern effect is stronger than the CSR strength effect for these firms. A further test shows that firm risk measured by stock return volatility plays as a direct channel through which a firm’s CSR activities affect loan spreads, whose result lends further support to our main results. Overall, our results provide strong evidence that CSR matters to the pricing of loan contracts beyond credit rating information and the results remain robust to the possible firm size effect and the endogeneity issues.     

Board interlocks and the diffusion of disclosure policy

We examine whether board connections through shared directors influence firm disclosure policies. To overcome endogeneity challenges, we focus on an event that represents a significant change in firm disclosure policy: the cessation of quarterly earnings guidance. Our research design allows us to exploit the timing of director interlocks and therefore differentiate the director interlock effect on disclosure policy contagion from alternative explanations, such as endogenous director-firm matching or strategic board stacking. We find that firms are more likely to stop providing quarterly earnings guidance if they share directors with previous guidance stoppers. We also find that director-specific experience from prior guidance cessations matters for disclosure policy contagion. The positive effect of interlocked directors on the likelihood of quarterly earnings guidance cessation is particularly strong for firms with interlocked directors who experienced positive outcomes from prior guidance cessation decisions. Overall, our evidence is consistent with interlocked directors serving as conduits for information sharing that leads to the spread of corporate disclosure policies.     

Industry contagion in loan spreads

Spreads on new and renegotiated corporate loans are significantly higher when the loan originates (or is renegotiated) in the two years surrounding bankruptcy filings by industry rivals. This industry-specific contagion is particularly severe in the middle of industry bankruptcy waves. Furthermore, this contagion in loan spreads is mitigated in concentrated industries, consistent with the hypothesis and evidence in Lang and Stulz (1992) that bankruptcy filings in concentrated industries can have positive consequences for rivals (increased market share and/or power). There is also some evidence that contagion affects non-spread terms in loan contracts.     

Gender board diversity and the cost of bank loans

We examine the relationship between female board representation and the cost of lending, using a dataset of 13,714 loans from 386 banks matched with 2432 non-financial firms from 1999 to 2013. We find that firms with female directors command lower loan spreads. In addition, female independent directors have a stronger impact on lowering spreads compared to female directors' other attributes. However, as firms build relationships with their lenders this effect becomes less potent. Finally, when we introduce firm-level heterogeneity we document that changes in gender diversity exert a stronger impact on the cost of lending in the case of bank-dependent firms, especially for relationship borrowers.     

Covering or monitoring? Independent director connectedness and corporate fraud in China

This paper examines how independent directors’ social capital, as measured by their social network, affects corporate fraud. We find that firms with well-connected independent directors are less likely to commit fraud, supporting our monitoring effect hypothesis. This result is robust to a battery of tests. Further analyses show that the effect is stronger for firms with a relatively poor legal environment, for firms whose independent directors face strong reputation incentives and when independent directors are audit committee members. Moreover, we explore a potential economic mechanism of the effect and observe that well-connected independent directors are associated with less absenteeism and more dissension. Overall, our findings suggest that independent directors’ social capital plays an important role in corporate governance.     

Examining the spread of high quality reporting through the corporate network

This paper explores whether high reporting quality spreads through the network formed by shared directors. Consistent with the notion that positive information is generally less impactful than negative information in affecting behavior, I find that a firm's own reporting quality is not affected by sharing a director with a firm that is considered to have high reporting quality. However, I find that a firm's reporting quality improves when the firm shares a director with a high reporting quality firm and a firm that is highly connected in the network (i.e.: central). The results suggest that high reporting quality needs the endorsement of a high status firm such as a central firm to travel through the network. Furthermore, firms that are susceptible to poor reporting are the most receptive to the high reporting quality signal coming through central firms. Altogether, this study documents that central firms are in a position to initiate positive reporting contagion.     

The impact of corporate fraud on director‐interlocked firms: Evidence from bank loans

We examine the impact of corporate fraud committed by one firm (the “fraudulent firm”) on other firms with interlocking directors (the “interlocked firms”), focusing on the debtholder side. We argue that the revelation of a fraudulent firm's fraud can damage the reputation of the interlocked firms because corporate governance can propagate via director interlocks. Empirically, we find that the interlocked firms' cost of debt is higher and the loan covenants become stricter after the fraud cases of the fraudulent firms are revealed. Consistent with the corporate governance propagation explanation, our results are weaker (stronger) for interlocked firms that have better (worse) pre‐event corporate governance standards. Our findings suggest that corporate fraud of fraudulent firms can affect other firms through director‐interlocks beyond shareholder value.     

Liability protection,director compensation,and incentives

We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.     

The role of private equity group reputation in LBO financing

This paper investigates whether the reputation of acquiring private equity groups (PEGs) is related to the financing structure of leveraged buyouts (LBOs). Using a sample of 180 public-to-private LBOs in the US between January 1, 1997 and August 15, 2007, we find that reputable PEGs are more active in the LBO market when credit risk spreads are low and lending standards in the credit markets are lax. We also find that reputable PEGs pay narrower bank and institutional loan spreads, have longer loan maturities, and rely more on institutional loans. In addition, while we find that PEG reputation is positively related to buyout leverage (i.e., LBO debt divided by pre-LBO earnings before interest, taxes, and amortization (EBITDA) of the target), and leverage is significantly positively related to buyout pricing, we do not find any direct relation between PEG reputation and buyout valuations. The evidence suggests that PEG reputation is related to LBO financing structure not only because reputable PEGs are more likely to take advantage of market timing in credit markets and but also because PEG reputation reduces agency costs of LBO debt.     

Proxy contests and debt contracting behavior: The interplay of managerial,shareholder and creditor incentives

We evaluate how heterogeneity in the strategic interplay among shareholder, creditor and manager incentives influences debt contracting behavior around proxy contests. We find that, after proxy contests, new loan originations have significantly higher spreads and more stringent non-pricing contracting terms. The effect, however, occurs largely in contest firms where Chief Executive Officers (CEOs) are provided with risk-taking incentives. Further, creditors’ simultaneous equity holdings and credit default swaps (CDS) trading attenuate the impact of proxy contests on debt contracting costs. Finally, proxy contests that culminate in voting and dissident victory experience the largest increase in loan pricing. Overall, our results suggest an increase in the agency cost of debt occurs after proxy contests, particularly when managerial risk-taking incentives are high, and when creditors do not simultaneously hold target firms’ equity or CDS.     

Non-executive ownership and private loan pricing

This paper examines the link between non-executive employee ownership and the terms and pricing of corporate loans. We find that a one-standard-deviation increase in employee stock ownership is associated with 1.67% decrease in loan spreads and one fewer restrictive loan covenant. The negative effect of employee stock ownership on loan spreads remains significant when we use within-firm variation and perform an analysis with instrumental variables based on demographic characteristics to address the concerns of endogeneity. Further analysis reveals that employee stock ownership may affect loan spreads by improving corporate governance, curbing managerial risk-taking, reducing information asymmetry, and improving employee retention. In contrast, we find that employee ownership via stock options is associated with greater loan spreads, perhaps owing to their convex payoff structure. Overall, our results underscore the importance of the level and structure of employee ownership for pricing corporate loans.     

Monitoring and bank loan pricing

In this paper, we examine the influence of contract costs on the pricing of bank loans. We find that the loan spread depends on a bank's screening and monitoring incentives, which varies across differentially regulated classes of banks. This leads to significant price disparities in the loan market. In particular, the US branches of Japanese banks participate in syndicated lending to US firms that charge significantly higher spreads compared to syndicated loans to US firms without Japanese participation. This pricing disparity is primarily due to regulatory differences. We also find that as specialized intermediaries, banks price loans based primarily on their own monitoring.     

Independent director incentives: Where do talented directors spend their limited time and energy?

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship's relative prestige. When directors experience an exogenous increase in a directorship's relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced Chief Executive Officer departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.     

WHOM YOU CONNECT WITH MATTERS: DIRECTOR NETWORKS AND FIRM LOCATION

We examine whether board members serve as a channel for remotely located firms to access the benefits from business‐dense areas due to economies of agglomeration. We find that geographically remote firms benefit from connections to firms in top metropolitan statistical areas (MSAs) for business density. After controlling for director compensation, we find connections to top MSA firms mitigate the negative effect of increased distance from business‐dense areas. We address concerns of endogeneity by exploring a sample of firms whose directors gain board seats at top MSA firms and find a similar positive impact of connections to top MSA firms.     

Independent director reputation incentives,accruals quality and audit fees

While prior research provides abundant evidence that independent directors are associated with favorable outcomes, researchers have only recently started to investigate the impact of independent director reputation incentives. This study examines whether the reputation incentives of independent directors are associated with accruals quality and audit fees. The results reveal a negative relationship between the proportion of independent directors with relatively low reputation incentives and accruals quality. Further, the proportion of independent directors with relatively low reputation incentives is positively associated with audit fees, suggesting that auditors view lower reputation incentives as increasing risk. We also find that Big 4/5 auditor office size moderates the relationship between independent director reputation incentives and audit fees. Specifically, our results indicate that audit fees increase less in response to lower reputation incentives as office size increases, suggesting that larger offices respond to the risks associated with lower reputation incentives more efficiently than smaller offices.     

Board Ties and the Cost of Corporate Debt

We examine the impact of firms’ board ties on bond yield spreads. Prior literature associates board connectedness with improved access to resources due to visibility and reputation arising from greater board capital. Consistent with the board capital hypothesis, we find that better connected firms are associated with greater media coverage and more ties to financial firms. Additionally, greater connectedness is linked with statistically and economically significant lower bond yield spreads, especially for firms with high information asymmetry. Our main result appears robust and includes significant negative (positive) changes in yield spreads to announcements of additions (departures) of highly connected directors.     

Overlapping board connections with banker directors and corporate loan terms: Evidence from syndicated loans

I look at the relationship between corporate loan terms and board members' connections to bankers through employment on other boards, a connection relatively unaffected by confounding factors. Using syndicated loan data, I find that firms connected to bankers via other boards are more likely to borrow, and they receive cheaper pricing. However, loan maturity does not differ between connected and unconnected firms. During the 2007–2008 financial crisis loan availability declined for all firms, but connected firms continued to borrow and to receive lower spreads. Generally, my results support the importance of social connections in decreasing information asymmetry and reducing transaction costs.     

Credit Contagion from Counterparty Risk

Standard credit risk models cannot explain the observed clustering of default, sometimes described as "credit contagion." This paper provides the first empirical analysis of credit contagion via direct counterparty effects. We find that bankruptcy announcements cause negative abnormal equity returns and increases in CDS spreads for creditors. In addition, creditors with large exposures are more likely to suffer from financial distress later. This suggests that counterparty risk is a potential additional channel of credit contagion. Indeed, the fear of counterparty defaults among financial institutions explains the sudden worsening of the credit crisis after the Lehman bankruptcy in September 2008.     

Bankruptcy outcomes: Does the board matter?

We examine the association between board composition and bankruptcy outcomes. Preliminary analyses provide no evidence that the proportion of outside directors is significantly associated with the likelihood that a Chapter 11 firm liquidates. Further analyses indicate, however, that the relation between the proportion of outside directors and bankruptcy outcomes is a function of the outside directors' ownership. More specifically, we find that the association is positive when outside director ownership is low and negative when it is high. The overall evidence supports the notion that a one-size-fits-all approach to corporate governance is likely to result in suboptimal board structures and hinder firms' strategies for dealing with poor performance.