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Date: 09 Nov 2012

Bankers on boards as corporate governance mechanism: evidence from Poland

Abstract

This paper examines whether a bank exercises a monitoring role when a banker is represented on a firm’s board. Bank monitoring reduces information asymmetries, and hence lessens firm’s financial constraints—phenomenon frequently measured by investment-cash flow sensitivity in the sample of all non-financial companies listed during 1999–2002 on the Polish stock exchange. I find that firms with a banker on the board rely more heavily on bank loans than on internal capital in their investment activities. In contrast, firms with no banker on the board finance to a larger extent their investment with internal capital than with credit. However, firms with the bank-lender representation on the board are almost as much financially constrained as firms without a bank-lender representative on the board. Hence, the presence of bankers on boards is not associated with bank monitoring. They rather promote their employer’s business. The findings show that investment of firms with a banker on the board is less sensitive to cash flow than investment of firms without bank representatives on the board. This result suggests that bankers on the board provide financial expertise that help those firm to reduce financial constraints.