Bankers on the board and the debt ratio of firms

We investigate the impact that bankers on the board have upon a firm's debt ratio, debt to total capital, 1 year subsequent to their appointment. We find that the presence of lending bankers on a firm's board negatively affects the debt ratio, while the impact of non-lending bankers varies with the firm's probability of financial distress. The results suggest that non-lending bankers provide expertise and certification for distressed firms while exercising a monitoring role for non-distressed firms. In contrast, the results suggest that lenders on the board exercise a monitoring role independent of the firm's financial distress. When combined with established findings in the literature, we conclude that there may be two ways to avoid conflict between a board-appointed banker's fiduciary responsibility and the interests of her bank. When the potential for conflict is high, lenders may forgo board positions, while non-lending bankers may merely alter their role on the board.