Bankers on boards: monitoring, conflicts of interest, and lender liability

We investigate the trade-off between the benefits from bank monitoring when a banker is represented on a firm's board and the costs from two sources: conflicts Of interests between lenders and shareholders, and U.S. legal doc trines that generate lender liability for bankers on boards of firms in fin ancial distress. Consistent with high costs of active involvement, bankers are on boards of large, stable firms with high proportions of collateraliza ble assets and low reliance on short-term financing. While permitting banks to own equity could mitigate conflicts, the protection of shareholder vers us creditor rights could continue to reduce the role of U.S. banks in corpo rate governance. (C) 2001 Published by Elsevier Science S.A.