Board Structure and Capital Structure
London School of Economics & Political Science (LSE) - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
Miguel A. Ferreira
Nova School of Business and Economics; European Corporate Governance Institute (ECGI)
Universidad Carlos III de Madrid; London School of Economics & Political Science (LSE)
March 5, 2012
Board structure has been linked to firm environment and characteristics, but the evidence is based on correlations rather than causal estimates. In particular, there is evidence of a positive correlation between board independence and financial leverage. Using a regression discontinuity design, we show that the number and fraction of independent directors increases following a debt covenant violation, as creditors can use the threat of accelerating loan payments to demand a more independent board of directors. The effect is economically important as a covenant violation implies up to one additional independent director in the board. Our findings establish a casual effect from firm characteristics – leverage – to board structure through a transfer of control from shareholders to creditors.
Number of Pages in PDF File: 37
Keywords: Corporate boards, Board independence, Capital structure, Covenant violations
JEL Classification: G32, G34working papers series
Date posted: March 15, 2012
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