Unfriendly Creditors: Debt Covenants and Board Independence
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)
London School of Economics & Political Science (LSE)
September 30, 2014
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 443/2014
We develop and test a theory of the relation between capital structure and the composition of the board of directors. Our model shows that board composition should become more management-unfriendly when a firm is close to financial distress. Empirical tests of this prediction indicate that the number of independent directors increases by roughly 30% following a loan covenant violation. The evidence suggests that board composition is an important channel through which creditors monitor borrowers.
Keywords: Corporate boards, Corporate governance, Covenant violations, Creditor intervention
JEL Classification: G21, G32, G33, G34
Date posted: March 15, 2012 ; Last revised: June 7, 2015
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