Board Structure and Capital Structure

Abstract:     
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, G34

working papers series