Bankers on the Board, Market Competition, and Conflicts of Interest

Abstract

Bankers on the board are expected to act as a fund-raiser and to help lowering financial costs, but they can impose conflicts of interest between shareholders and creditors. We empirically analyse the impact of banker-directors on corporate leverage and investment, using Korean firm data during the period from 2000 to 2012. Bankers on the board turn out to play different roles depending on market competition and macroeconomic circumstance. In less competitive industries where banks are less concerned about financial distress as a creditor, the presence of bankers on the board has higher leverage and more active investment, which can align with the interest of shareholders. However, in more competitive environment where firms are more concerned about financial distress and external financing, bankers on the board do not always increase leverage and investment, which can be divergent from the interest of shareholders.

Key Words:

• Banker
• board
• market competition
• conflicts of interest

Jel Classification:

• G3
• L1

Acknowledgement

This work was supported by IT forum under the research project, “A Study on the Relationship between Market Structure and the Conflicts of Interest”.

Notes

1. In this study, we consider the interest of bankers on the board as being their “own” as debt holders in the sense that it does not necessarily align with shareholders' interest. Thus, even though bankers pursue their “own” interest, it does not exclude any case in which it can be consistent with firm's value maximization since that of shareholders is not necessarily consistent with pursuing firm's value maximization either.

2. Park et al. (2003) and Park et al. (2011) use outside director from financial sector variable using Korean data as a determinant of corporate performance and leverage. Park et al. (2003) do not find significant relation between outside director from financial sector and firm performance, while Park et al. (2011) find that bankers on the board as outside director increase long-term loan and corporate leverage. However, those studies do not focus on the aspect of this paper that the relationship can depend on market structure, and have different implications in terms of agency costs.

3. Park et al. (2003) and Park et al. (2011) use outside director from financial sector variable using Korean data as a determinant of corporate performance and leverage. Park et al. (2003) use KLCA database. The data of Park et al. (2011) come from FnGudie. Since we manually added the director profile data in the detailed information of annual reports from DART as well as KLCA, our data has slightly higher mean value of banker dummy variable than former research which have constructed same variable.

4. If we follow the empirical specification of Park et al. (2011), we could replicate similar results explaining the relationship between banker presence as outside directors and corporate leverage.

5. Median of the basis interest rate from 2000–2012 takes the value 3.75, which is equal to average value.