Abstract
This paper investigates whether non-CEO inside director reputation matters in bank loan contracting. Reputable inside directors (RIDs) can improve borrowers’ financial reporting quality and reduce agency risk in loan contracting. Based on regression analysis of 5,104 loan facilities during 1999-2007, we find that borrowers with reputable inside directors enjoy lower loan interest rate and a smaller number of restrictive covenants, and are less likely to have the loans secured by collateral, compared with borrowers without RIDs. The results still hold after we control for the reputation of CEOs and address the endogeneity of RIDs and the joint determination of various loan contracting terms. These findings shed light on the impact of director-level reputation in the context of bank loan market.
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