leverage in the board room: the unsung influence of private lenders in corporate governance
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Leverage in the Board Room: The Unsung Influence of Private Lenders in Corporate Governance. Forthcoming 57 UCLA L. Rev. __ (2009). Frederick Tung Emory University School of Law. Law and New Institutional Economics Workshop University of Colorado Law School June 5, 2009. - PowerPoint PPT PresentationTRANSCRIPT
Leverage in the Board Room:The Unsung Influence of Private Lenders
in Corporate Governance
Frederick TungEmory University School of Law
Law and New Institutional Economics WorkshopUniversity of Colorado Law School
June 5, 2009
Forthcoming 57 UCLA L. Rev. __ (2009)
Leverage in the Board Room
I. Background
II. The Dynamics of Leverage
III. The Limits of Lender Governance
IV. Implications
I. Background
2
A. Traditional Corporate Governance:Agency Costs and Corporate Law
shareholders
Board of directors
officers
Other employees
thecorporation
Corporate law
Agency costs
B A
C K
G R
O U
N D
I. Background
2
A. Traditional Corporate Governance:Agency Costs and Corporate Law
B. Bank Governance:Finance Bank are special.Law Distress-induced creditor intervention. Triantis & Daniels ’95:
Interactive stakeholder governance. Baird & Rasmussen ’06:
Covenants shift control to private lenders. Shepherd, Tung & Yoon ’08:
Bank monitoring improved firm value.
B A
C K
G R
O U
N D
I. Background
1. Covenants
2. Reporting and Access
3. Institutional Practices
3S T
R U
C T
U R
E
C. Structure of Lender Governance
I. Background
1. Covenants
2. Reporting and Access
3. Institutional Practices
3S T
R U
C T
U R
E
Financial
Investment constraints
Fundamental changes
C. Structure of Lender Governance
I. Background
1. Covenants
2. Reporting and Access
3. Institutional Practices
3S T
R U
C T
U R
E
Periodic financial reports
Certifications
Access to books and records, management and accountants
C. Structure of Lender Governance
I. Background
1. Covenants
2. Reporting and Access
3. Institutional Practices
3S T
R U
C T
U R
E
Bankers on board
Cash management
Short maturities
C. Structure of Lender Governance
I. Background
2 B A
C K
G R
O U
N D
D. Compare Traditional Governance Mechanisms:
Gov Mech
Eff-FactorPrivate Lenders Outside Directors
Information
Incentives
Expertise
Enforcement
I. Background & Framework
2 B A
C K
G R
O U
N D
D. Compare Traditional Governance Mechanisms:
Gov Mech
Eff-FactorPrivate Lenders Outside Directors
InformationContinuous information flow. Less continuous
information.
IncentivesTypically strong financial incentive.
Some incentives (esp. weak re CEO TURNOVER).
ExpertiseTypical industry expertise. Specific expertise
unlikely.
EnforcementStrong. Varied.
II. The Dynamics of Leverage
A. Durable Banking Relationships & Renegotiation
B. Stages of Lender Influence:Covenants, Contingencies, & Violations
C. Operational Consequences
3D Y
N A
M I
C S
O F
L E
V E
R A
G E
II. The Dynamics of Leverage
A. Durable Banking Relationships & Renegotiation Renegotiation is the norm.
• 90% > 1 year• 96% > 3 years• 44% of original term
Major changes to fundamental terms.Loan term• maturity• loan amount• interest spread
3D Y
N A
M I
C S
O F
L E
V E
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G E
Avg. change64% 43%40%
II. The Dynamics of Leverage
A. Durable Banking Relationships & Renegotiation Renegotiation rarely causes change in lender.
3D Y
N A
M I
C S
O F
L E
V E
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G E
II. The Dynamics of Leverage
B. Stages of Lender Influence:Covenants, Contingencies, & Violations
Performance pricing Violations very common.
3D Y
N A
M I
C S
O F
L E
V E
R A
G E
II. The Dynamics of Leverage
B. Stages of Lender Influence:Covenants, Contingencies, & Violations
Financial policy (>90%) Net borrowing drops by 105 basis points following
violation (75th to 35th %-ile) Investment policy (33-40%)
15-20% greater decline with initial covenant Imposition very sensitive to firm performance
Forced CEO turnover Much more sensitive to firm performance with bank
debt— 25-46% greater likelihood— 67-90% greater likelihood if also violation
3D Y
N A
M I
C S
O F
L E
V E
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G E
II. The Dynamics of Leverage
C. Operational Consequences
3D Y
N A
M I
C S
O F
L E
V E
R A
G E
III. Limits of Lender Governance
Market Effects
A. Liquidity
B. Risk Transfer
3L I M
I T
S
Syndication
Secondary loan markets
Credit derivatives
IV. Implications
A. Governance spillovers from regulation of creditors and credit markets.
a. Debtor-creditor lawb. Financial regulation: CDS
markets
B. Is lender governance efficient? . . . and other directions for corporate governance research.
3I M P
L I
C A
T I O
N S
Leverage in the Board Room:The Unsung Influence of Private Lenders
in Corporate Governance
Frederick TungEmory University School of Law
Law and New Institutional Economics WorkshopUniversity of Colorado Law School
June 5, 2009