Corporate Boards and the Leverage and Debt Maturity Choices
University of Washington
University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)
Xinlei Shelly Zhao
Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division; Kent State University - Department of Finance
Debt, and in particular, short-term debt have the potential to discipline managers. We examine the role of the board in making financing decisions that provide this discipline. Specifically, given a firm's characteristics, we predict that stronger boards will force the firm to hold more debt and more short-term debt. Employing a rich dataset of board characteristics and controlling for other aspects of a firm's corporate governance, we find support for these hypotheses. Our simple measure of director power is a robust and promising measure of internal governance.
Number of Pages in PDF File: 36
Keywords: leverage, debt maturity, board effectiveness, incentive alignment, director power, governance
JEL Classification: G32, G34
Date posted: March 16, 2006
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