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Bondholder representatives on bank boards: A device for market discipline

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  • Isabelle Distinguin
  • Laetitia Lepetit
  • Frank Strobel
  • Phan Huy Hieu Tran

Abstract

We examine whether board representation of bondholders can be an effective market discipline mechanism to reduce bank risk, using a unique dataset combining information on bondholders and boards of directors of European listed banks. Our results show that the influence of bondholder representatives on the bank board significantly reduces bank risk without impacting profitability. The beneficial effect of this market discipline mechanism is stronger when bondholder representatives have regulatory experience, current or long relationships with their affiliated bondholders, and for more complex banks. In contrast, the reducing impact on bank risk is smaller for banks with lower capitalization levels.

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  • Isabelle Distinguin & Laetitia Lepetit & Frank Strobel & Phan Huy Hieu Tran, 2023. "Bondholder representatives on bank boards: A device for market discipline," Economic Inquiry, Western Economic Association International, vol. 61(3), pages 738-765, July.
    • Handle: RePEc:bla:ecinqu:v:61:y:2023:i:3:p:738-765
    DOI: 10.1111/ecin.13137
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