The presence of commercial bank executives on the boards of directors of non-financial companies: Effects on firm financing decisions, investment decisions and performance

Notwithstanding the tradition of the separation of banking and commerce, bank executives occupy a significant portion of the seats on the boards of directors of non-financial companies in the U.S. In 2002, 27.48 percent of the companies that were in the S&P 500 Index had an executive from a commercial bank serving on their boards. Around 60 percent of these directors' banks were, at the same time, extending loans to the companies in which they served as a director. This study addresses the impact of banker-directors on the financial outcomes of the companies utilizing a hand-collected a dataset on the boards of directors of the companies that constitute the S&P 500 Index for the period 2002-2004. In Chapter 2, I study the effect of banker-directors on firm financing decisions and outcomes. I show that the presence of a banker-director on a company's board is associated with an increase in private debt finance, a lower cost of private borrowing, and a decrease in the restrictive covenants included in private debt contracts. In Chapter 3, I study the effects of banker-directors on the acquisition decisions and show that shareholder reaction to acquisitions is positive when there is a bank executive serving on an acquirer's board of directors. Finally, in Chapter 4, I examine whether improved access to finance and better acquisition outcomes are reflected in the firm performance metrics when a banker is present on a board, and establish a positive relationship between firm performance (return on assets, and stock market returns) and banker presence on a board. In contrast to these favorable outcomes, the banker presence on a company's board of directors is associated with lower market-to-book ratios, and this result remains as a puzzle in this research and is left for investigation in future research.