Debt, information asymmetry and bankers on board

João Amaro de Matos and João Mergulhão

Abstract

This paper contributes to the financial networks literature by providing evidence that well-connected bankers on the boards of directors of nonfinancial firms reduce information asymmetry between credit markets and firms. Although it is well known that the presence of bankers on these boards likely facilitates firms’ capacity to increase their debt level, we clarify this statement in two different ways. First, we show that the impact of the presence of bankers on leverage is driven by firms with low levels of debt. For firms with high levels of debt this effect is not statistically significant. Second, the impact on the leverage ratio of the presence of bankers on the board is amplified the more connected these bankers are to the corporate world. In addition, the results are more pronounced for less transparent firms. Our findings suggest that the connectedness of bankers plays a key role in reducing information asymmetry.

• Bankers on boards of nonfinancial firms are associated with higher leverage ratios.
• The more connected the banker, the higher the leverage ratio.
• The higher the information asymmetry, the greater the impact of the banker’s connectedness.
• Bankers facilitate the increase of leverage ratio only for low-debt firms.
• The more connected the banker, the larger the impact on the leverage ratio.