The Economics of Corporate Governance and Mergers

The Economics of Corporate Governance and Mergers

Edited by Klaus Gugler and B. Burcin Yurtoglu

This book provides an insightful view of major issues in the economics of corporate governance (CG) and mergers. It presents a systematic update on the developments in the two fields during the last decade, as well as highlighting the neglected topics in CG research, such as the role of boards, CG and public interest and the relation of CG to mergers. Two important conclusions can be drawn from this book: the first is that corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance; second, there is an important relationship between CG structures and the quality of firm decision-making, one of the most important being the decision to merge or take over another firm.

Chapter 5: Corporate Governance: A Review of the Role of Banks

Hans Degryse, Steven Ongena and Günseli Tümer-Alkan

Subjects: business and management, corporate governance, economics and finance, corporate governance


* Hans Degryse, Steven Ongena and Günseli Tümer-Alkan I INTRODUCTION In many countries, banks are the most important providers of external finance, in particular for small and medium-sized enterprises (SMEs). Hence, the banks’ role in the financing and governance of firms is relevant for the smooth functioning and growth of an economy. Banks not only interact with firms through debt financing, in some countries they also play an important role as firms’ large shareholders and board members. The goal of this chapter is to provide an overview of the role of financial institutions in the governance of firms through the different corporate governance mechanisms. We aim to address the question: ‘How do banks act as debt financiers, large shareholders, and board members?’ Along the way, we also indicate how banks differ from other players’ role in the corporate governance of firms. Banks and firms enter into a relationship to overcome problems of asymmetric information. Without such a relationship firms may be financially constrained. Diamond (1984) shows that the raison d’être for financial intermediaries may be the reduction in the cost of monitoring information and therefore the resolution of incentive problems in the debt markets. Banks screen firms’ loan applications, and monitor firms by designing loan contracts and by interacting frequently. Also, as first argued by Fama (1985), bank loans signal the creditworthiness of firms to other market players, and thereby reduce the information costs for the other contracts. In this chapter, we provide a brief...

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