Board Networks and the Cost of Corporate Debt

Abstract

This paper examines how the extent of industrial firms’ connectedness to other firms through board interlocks is associated with their bond yield spreads. We hypothesize that the transmission of more “soft” information about better connected firms would lower information asymmetries of such firms, potentially lowering the perceived riskiness of their bonds. Using bid-ask spread as a measure of information asymmetry and a sample of 5,402 bond-year observations over the 1994-2006 period, we find that greater connectedness is associated with statistically and economically significant lower bond yield spreads, ceteris paribus. Supporting the information flow hypothesis, we find larger benefits from greater connectedness for firms with higher information asymmetries and for firms with more extensive ties to financial firms. Overall, our findings suggest that firms obtain benefits from being better networked in the form of lower borrowing costs.

Keywords: networks, cost of debt, board connections, information flow

JEL Classification: G10, G12, G30