Corporate Governance and the Cost of Debt: Evidence from Director Limited Liability and Indemnification Provisions
Duke University - Fuqua School of Business
University of Baltimore
February 18, 2010
Journal of Corporate Finance, 2011, 17, 83-107
We find that firms that provide limited liability and indemnification for their directors enjoy higher credit ratings and lower yield spreads. We argue that such provisions insulate corporate directors from the discipline from potential litigation, and allow them to pursue their own interests by adopting low-risk, self-serving operating strategies, which coincidentally redound to the benefit of corporate bondholders. Our evidence further suggests that the reduction in the cost of debt may offset the costs of directorial shirking and suboptimal corporate policies occasioned by this insulation, which may explain why stockholders have little incentive to rescind these legal protections.
Number of Pages in PDF File: 58
Keywords: limited liability provision, indemnification, corporate governance, cost of debt, risk taking, board of directors
JEL Classification: G30, G34, K22Accepted Paper Series
Date posted: February 20, 2010 ; Last revised: July 20, 2012
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