Skip to main content Accessibility help

Do Banks Price Independent Directors’ Attention?

  • Henry He Huang, Gerald J. Lobo, Chong Wang and Jian Zhou


Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.


Corresponding author

*Huang (corresponding author),, Yeshiva University Sy Syms School of Business; Lobo,, University of Houston Bauer College of Business; Wang,, The Hong Kong Polytechnic University School of Accounting and Finance; Zhou,, University of Hawaii at Manoa Shidler College of Business.


Hide All

We thank Paul Malatesta (the editor) and Ronald Masulis (associate editor and referee) for their many insightful and constructive suggestions. We thank Juan Qin for excellent research assistance and Miao Hu, Dengshi Huang, Joe Kerstein, Victor Wei Huang, Zhonggao Lin, Qianqiu Liu, Ghon Rhee, Tiesheng Zhang, Jun Zheng, Hongquan Zhu, Jia-nan Zhou, and the workshop participants at Anhui University of Technology, Southwest Jiaotong University, University of Hawaii at Manoa, and University of Kentucky for their helpful comments. Wang acknowledges the financial support from The Hong Kong Polytechnic University Start-Up Fund and the National Natural Science Foundation of China (Fund #71332008). Zhou gratefully acknowledges the research support from Lloyd Fujie / Deloitte Foundation Professorship and the summer research support from the Shidler College of Business at the University of Hawaii at Manoa.



Hide All
Adams, R., and Ferreira, D.. “Do Directors Perform for Pay?Journal of Accounting and Economics, 46 (2008), 154171.
Altman, E. I.Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589609.
Anderson, R. C.; Mansi, S. A.; and Reeb, D. M.. “Board Characteristics, Accounting Report Integrity, and the Cost of Debt.” Journal of Accounting and Economics, 37 (2004), 315342.
Asquith, P.; Au, A.; Covert, T.; and Pathak, P.. “The Market for Borrowing Corporate Bonds.” Journal of Financial Economics, 107 (2013), 155182.
Beasley, M.An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud.” Accounting Review, 71 (1996), 443465.
Becker, B., and Milbourn, T.. “How Did Increased Competition Affect Credit Ratings?Journal of Financial Economics, 101 (2011), 493514.
Bhojraj, S., and Sengupta, P.. “Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and the Outside Directors.” Journal of Business, 76 (2003), 455475.
Bolton, P., and Scharfstein, D.. “Optimal Debt Contracts and the Number of Creditors.” Journal of Political Economy, 104 (1996), 125.
Boubakri, N., and Ghouma, H.. “Control/Ownership Structure, Creditor Rights Protection, and the Cost of Debt Financing: International Evidence.” Journal of Banking and Finance, 34 (2010), 24812499.
Bradley, M., and Roberts, M.. “The Structure and Pricing of Corporate Debt Covenants.” Working Paper, University of Pennsylvania (2004).
Bushman, R., and Wittenberg-Moerman, R.. “The Role of Bank Reputation in ‘Certifying’ Future Performance Implications of Borrowers’ Accounting Numbers.” Journal of Accounting Research, 50 (2012), 883930.
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 20852121.
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371406.
Costello, A., and Wittenberg-Moerman, R.. “The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports.” Journal of Accounting Research, 49 (2011), 97136.
Davydenko, S.; Strebulaev, I.; and Zhao, X.. “A Market-Based Study of the Cost of Default.” Review of Financial Studies, 25 (2012), 35733609.
Demiroglu, C., and James, C. M.. “The Information Content of Bank Loan Covenants.” Review of Financial Studies, 23 (2010), 37003737.
Dichev, I., and Skinner, D.. “Large-Sample Evidence on the Debt Covenant Hypothesis.” Journal of Accounting and Economics, 40 (2002), 10911123.
Drucker, S., and Puri, M.. “On Loan Sales, Loan Contracting and Lending Relationships.” Review of Financial Studies, 22 (2009), 28352872.
Ferris, S.; Jagannathan, M.; and Pritchard, A.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 58 (2003), 10871111.
Fich, E. M., and Shivdasani, A.. “Are Busy Boards Effective Monitors?Journal of Finance, 61 (2006), 689724.
Fields, P.; Fraser, D. R.; and Subrahmanyam, A.. “Board Quality and the Cost of Debt Capital: The Case of Bank Loans.” Journal of Banking and Finance, 36 (2012), 15361547.
Garcia Lara, J. M.; Garcia Osma, B.; and Penalva, F.. “Accounting Conservatism and Corporate Governance.” Review of Accounting Studies, 14 (2009), 161201.
Graham, J.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 4461.
Hermalin, B., and Weisbach, M.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 9 (2003), 726.
Huang, H.; Lobo, G. J.; Wang, C.; and Zhou, J.. “Attention Please: How Does Directors’ Uneven Attention among Multiple Directorships Affect Firms’ Earnings Management.” Working Paper, Yeshiva University, University of Houston, University of Kentucky, and University of Hawaii at Manoa (2014).
Ivashina, V., and Scharfstein, D.. “Bank Lending during the Financial Crisis of 2008.” Journal of Financial Economics, 97 (2010), 319338.
Johnson, S. A.Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage.” Review of Financial Studies, 16 (2003), 209236.
Klein, A.Audit Committee, Board of Director Characteristics, and Earnings Management.” Journal of Accounting and Economics, 33 (2002), 375400.
Larcker, D.; Richardson, S.; and Tuna, A.. “Corporate Governance, Accounting Outcomes, and Organizational Performance.” Accounting Review, 82 (2007), 9631008.
Li, N.Negotiated Measurement Rules in Debt Contracts.” Journal of Accounting Research, 48 (2010), 11031144.
Mansi, S.; Maxwell, W.; and Miller, D.. “Analyst Forecast Characteristics and the Cost of Debt.” Review of Accounting Studies, 16 (2011), 116142.
Masulis, R. W., and Mobbs, S.. “Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?Journal of Financial Economics, 111 (2014), 406429.
Masulis, R. W., and Mobbs, S.. “Independent Director Reputation Concerns.” Working Paper, University of New South Wales and University of Alabama (2015).
McMullen, D., and Raghunandan, K.. “Enhancing Audit Committee Effectiveness.” Journal of Accountancy, 182 (1996), 7981.
Menon, K., and Williams, J. D.. “The Use of Audit Committee for Monitoring.” Journal of Accounting and Public Policy, 13 (1994), 121139.
Qi, Y.; Roth, L.; and Wald, J.. “Political Rights and the Cost of Debt.” Journal of Financial Economics, 95 (2010), 202226.
Qian, J., and Strahan, P.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 28032834.
Ryan, H., and Wiggins, R.. “Whose Is in Whose Pocket? Director Compensation, Board Independence, and Barriers to Effective Monitoring.” Journal of Financial Economics, 73 (2004), 497524.
Sengupta, P.Corporate Disclosure Quality and the Cost of Debt.” Accounting Review, 73 (1998), 459474.
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 18291853.
Smith, C.A Perspective on Accounting-Based Debt Covenant Violations.” Accounting Review, 68 (1993), 289303.
Vafeas, N.Board Meeting Frequency and Firm Performance.” Journal of Financial Economics, 53 (1999), 113142.
Xie, B.; Davidson, W. N.; and Dadalt, P.. “Earnings Management and Corporate Governance: The Roles of the Board and the Audit Committee.” Journal of Corporate Finance, 3 (2003), 295316.
Yermack, D.Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185211.
Type Description Title
Supplementary materials

Huang et al. supplementary material
Huang et al. supplementary material 1

 Unknown (787 KB)
787 KB


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed