Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 19; pp. 140 - 158
• Main Authors: Hilscher, Jens, Şişli-Ciamarra, Elif
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.02.2013; Elsevier Science Ltd
• Subjects: Acquisitions; Acquisitions & mergers; Bankers on boards; Board of directors; Boards of directors; Conflicts of interest; Corporate governance; Credit market reaction; Creditors; Shareholders wealth; Shareholder–creditor conflicts; Stockholders; Studies; United States > US; Shareholder–creditor conflicts; Acquisitions; Bankers on boards; Corporate governance; G21; G34; Board of directors; Credit market reaction
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2012.10.001

This paper investigates the effects on acquisitions of creditor-director presence on corporate boards. Using a hand-collected dataset for boards of large U.S. corporations, we find that companies with creditor-directors are more likely to engage in acquisitions with attributes that are unfavorable to shareholders and favorable to creditors (more diversifying and fewer cash-financed acquisitions). Consistent with these patterns, acquisition announcements are associated with lower shareholder value, higher creditor value, and lower overall firm value when a creditor is present. These results support the hypothesis that conflicts of interest between shareholders and creditors can result in value-destroying acquisitions. In addition, commercial bankers with no lending relationship are not affected by conflicts of interest. Where appropriate, our estimation strategy takes into account that there may be self selection of bankers onto corporate boards. ► Creditors on boards are associated with acquisitions that increase creditor value. ► They are associated with acquisitions that decrease shareholder value. ► Effect on overall firm value is negative. ► These results do not apply to unaffiliated commercial bankers. ► We show that self-selection is an empirical concern when analyzing creditor-directors.