Board Characteristics, Accounting Report Integrity, and the Cost of Debt
Ronald C. Anderson
American University - Kogod School of Business
Virginia Polytechnic Institute & State University
David M. Reeb
National University of Singapore
November 15, 2003
Journal of Accounting & Economics (JAE), Vol. 37, No. 3, 2004
Creditor reliance on accounting-based debt covenants suggests that debtors are potentially concerned with board of director characteristics that influence the financial accounting process. In a sample of S&P 500 firms, we find that the cost of debt financing is inversely related to board independence and board size. We also examine the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process. We find that fully independent audit committees are associated with a significantly lower cost of debt financing. Similarly, yield spreads are also negatively related to audit committee size and the number of audit committee meetings. Overall, these results provide market-based evidence that boards and audit committees are important elements affecting the reliability of financial reports.
Number of Pages in PDF File: 43
Keywords: Accounting process, debt covenants, audit committee composition, board composition, corporate governance, financial statements, accounting information
JEL Classification: M41, M49, K00, G12, G34
Date posted: April 15, 2004 ; Last revised: April 21, 2014
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