The Effects of Board Characteristics on Loan Covenants: An Empirical Analysis

The objective of this study is to determine which characteristics of a company’s board of directors that are generally favored by the shareholders (specifically, higher level of independence, smaller board size, higher equity ownership, and presence of financial experts), are also used by creditors to reduce the intensity of loan covenants. Using a sample of 2,095 loans from DealScan database for the period between 1996 and 2009, we find that creditors’ board preferences are different from those of the shareholders for three of the four main board characteristics. Specifically, we find that a lower covenant intensity index is associated with greater board independence, greater board size, lower equity ownership by directors, and less financial expertise on board. We also find that a lower covenant intensity index is associated with greater audit committee independence and compensation committee independence, as well as greater audit committee size.