Bank-appointed directors and idiosyncratic volatility: evidence from India

Abstract

Purpose

The purpose of this paper is to empirically examine the impact of the bank-appointed directors on the agency costs of debt by using the idiosyncratic risk of stock returns as a measure of agency costs of debt.

Design/methodology/approach

We use multivariate panel regression, event study and finally, propensity score matching approaches to test our hypothesis. The robustness of the results is tested for possible endogeneity issues by employing instrumental variable two-stage least square (IV-2SLS) technique.

Findings

Consistent with the efficient monitoring hypothesis, we find a negative relationship between the presence of the bank-appointed director and the idiosyncratic volatility of stock returns among Indian firms. This implies that such firms take up less risky investment projects.

Originality/value

We contribute to the literature from two aspects. First, to the best of our knowledge, this is the first study that examines the monitoring efficiency of creditors' governance. Hitherto, such examinations are done from the shareholders' perspective. Second, we examine the role of the bank-appointed directors on the board of non-financial firms in an emerging world context and find, contrary to the existing evidence in the US context, active monitoring role played by such directors.

Citation

Jadiyappa, N., Joseph, A. and Sisodia, G. (2022), "Bank-appointed directors and idiosyncratic volatility: evidence from India", International Journal of Managerial Finance, Vol. 18 No. 2, pp. 222-239. https://doi.org/10.1108/IJMF-06-2020-0270