Board Networks and the Cost of Corporate Debt

45 Pages Posted: 22 Mar 2010 Last revised: 18 Aug 2010

See all articles by Tuugi Chuluun

Tuugi Chuluun

Loyola University Maryland

Andrew K. Prevost

University of Vermont

John Puthenpurackal

University of Nevada, Las Vegas - Department of Finance

Date Written: August 16, 2010

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

Suggested Citation

Chuluun, Tuugi and Prevost, Andrew K. and Puthenpurackal, John, Board Networks and the Cost of Corporate Debt (August 16, 2010). Available at SSRN: https://ssrn.com/abstract=1573333 or http://dx.doi.org/10.2139/ssrn.1573333

Tuugi Chuluun

Loyola University Maryland ( email )

4501 North Charles Street
Baltimore, MD 21210-2699
United States

Andrew K. Prevost

University of Vermont ( email )

Burlington, VT 05405
United States

John Puthenpurackal (Contact Author)

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

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