How Do Banks Influence Firm Capital Structure?

• Author: Saibal Ghosh
• Published date: 01 October 2016
• DOI: http://doi.org/10.1002/jcaf.22189
• Date: 01 October 2016

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© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22189

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How Do Banks Influence Firm

Capital Structure?

Saibal Ghosh

INTRODUCTION

Notwithstanding

the growing separa-

tion of banking and

commerce, banker-

directors continue to

occupy a significant

role in non financial

firms. In the United

States, for example,

during 1988–2001,

43% of the firm-years

had a director, either

commercial banker

or investment banker

(Guner, Malmendier, &

Tate, 2008). In

around 50% of the

cases, these direc-

tors were involved in

extending loans to

these firms. It there-

fore remains a moot

question whether

banker-directors mat-

ter for firm capital

structure.

The effect of

these banker-director

on the firm finan-

cial structure can

work either way.

On the one hand, a

banker-director can

improve the scope of

banking relationships

so that the amount

of proprietary infor-

mation available to

the bank about the

firm increases. As

a result, the firm

might be able to raise

more debt finance

at competitive rates.

On the flip side, there

is some evidence

that close lending

relationships could

engender an infor-

mation monopoly

for the bank (Rajan,

1992). The close ties

might provide the

bank with a pricing

advantage vis-à-vis

other potential credi-

tors. This can lead

to an increase in the

cost of capital for

the firm (von Thad-

den, 1995). Relatedly,

a board seat might

intensify the conflict

of interests between

the shareholders and

creditors, leading to

The role of outside directors on firm boards has

been widely discussed in the literature. However,

it has been argued that outside directors are not

homogeneous and that certain kinds of outside

directors might be better than others. In this

context, employing data on publicly listed Indian

manufacturing firms for the period 2001–2012,

the paper examines the impact of banker-directors

firm capital structure and its composition, includ-

ing lending rates. Taking on board the fact tha t the

viewpoint of commercial banker-director in terms

of loan or investment exposures is likely to be dif-

ferent from that of an investment banker-director,

we segregate banker-directors into these two cat-

egories. The findings suggest that firms with both

commercial as well as investment banker-directors

have higher debt levels, although its composition

differs. More specifically, the increase in debt for

the former is driven by a rise in bank debt, whereas

in case of the latter, it is driven by increases in non-

bank debt. Looking at lending rates, the evidence

points to the fact that commercial banker-directors

which maintain lending relationships with the firm

charge higher interest rates, although the evidence

is not so compelling for firms having investment

banker-directors. Disaggregating firms on the basis

of equity and board presence, we find that firms

with stronger bank ties are much better placed to

access bank finance. © 2016 Wiley Periodicals, Inc.

Refereed (Double-Blind

Peer Reviewed)