Disloyal Managers and the Choice between Bank Debt and Public Debt
Prof. Mark Yuzhi YAN
Assistant Professor
Department of Accountancy, Economics and Finance
Hong Kong Baptist University
Traditionally, fiduciaries’ duty of loyalty demands that they not pursue business opportunities that could benefit their own companies. Starting with Delaware in 2000, several states now allow companies to waive this duty. We find that the affected firms’ debt structure shifts towards bank debt relative to public debt, suggesting that firms rely on more intense bank monitoring to address potential managerial disloyalty. The shift is more pronounced for firms with CEOs more likely to appropriate the firm’s business opportunities and less pronounced for firms with stronger shareholder monitoring. Last, we document that banks impose stricter monitoring on the affected firms.
