Does Board Independence Reduce the Cost of Debt?
Duke University - Fuqua School of Business
University of Baltimore
August 6, 2013
Using the passage of the Sarbanes-Oxley Act of 2002 and the associated change in listing standards as a natural experiment, we document that increased board independence results in higher levels of managerial risk-taking and dividend payout. Moreover we find that while independence decreases the cost of debt when credit conditions are strong or leverage low, it increases the cost of debt when credit conditions are poor or leverage high. These results suggest that, acting in the interest of shareholders, independent directors are increasingly costly to bondholders with the intensification of the agency conflict between these two stakeholders.
Number of Pages in PDF File: 47
Keywords: corporate governance, Sarbanes-Oxley Act, board independence, risk-taking, payout, credit condition, leverage, agency conflict, cost of debt
JEL Classification: G34, K22working papers series
Date posted: July 19, 2010 ; Last revised: August 7, 2013
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