The Non-monotonic Effect of Board Independence on Credit Ratings

Abstract:     
Using the Sarbanes-Oxley Act of 2002 as a natural experiment, we document a non-monotonic relation between board independence and credit ratings. Ratings are upgraded with an exogenous increase of board independence only when independence is low, which is consistent with the costs as well as benefits of having independent directors. Further analysis suggests that these costs may include the deficiency of the industrial expertise of independent directors, the cost of information acquisition for independent directors to become informed to monitor management, and the risk-taking incentive of these directors that may adversely affect the credit risk of a financially distressed firm.

Number of Pages in PDF File: 40

Keywords: board independence, credit rating, board expertise, agency cost of debt, information acquisition, monitoring; advising, risk-taking

JEL Classification: G24, G34

Accepted Paper Series