Creditors' governance, information asymmetry and debt diversification: evidence from India

• Published in: International journal of managerial finance Vol. 17; no. 2; pp. 282 - 302
• Main Authors: Jadiyappa, Nemiraja, Sisodia, Garima, Anto, Joseph, Shrivastsava, Santosh, Pavana Jyothi
• Format: Journal Article
• Language: English
• Published: Bradford Emerald Group Publishing Limited 08-03-2021
• Subjects: Asymmetry; Banks; Diversification; Hypotheses; R&D; Research & development; Stockholders
• ISSN: 1743-9132; 1758-6569
• DOI: 10.1108/IJMF-01-2020-0013

PurposeThe governing role of bank-appointed directors (BADs) on the boards of non-financial firms has a potential to reduce information asymmetry between the firm and non-bank lenders. This should increase the confidence of other creditors in firm activities, thus performing the certification role. Therefore, the purpose of this paper is to empirically examine the certification role of BADs.Design/methodology/approachThe authors test their hypotheses by using a panel of Indian non-financial firms. Our approach involves examining whether there is a significant difference in the number of different debt sources, the dispersion of debt among different debt sources, and leverage for BAD and Non_BAD Firms. The authors use univariate analysis and multivariate regression models to test the difference.FindingsThe authors find that firms with BADs on their board have (1) access to a higher number of different debt sources, (2) debt distributed evenly among different sources and (3) a higher debt ratio. Overall, our study provides supporting evidence for the certification role that BADs play on the boards of non-financial firms.Originality/valueThe authors contribute to the literature in two aspects. First, to the best of our knowledge, this is the only study that examines the effect of the governing role of banks on the lending decisions of non-bank lenders. Second, our study is associated with the growing body of the governance literature in the emerging markets context by examining the interaction of financial policies and governance in an institutional framework, which is very different from that of the developed world.