The Non-monotonic Effect of Board Independence on Credit Ratings

40 Pages Posted: 19 Jul 2010 Last revised: 11 Aug 2014

Date Written: August 10, 2014


Using the Sarbanes-Oxley Act of 2002 as a natural experiment, we document a non-monotonic relation between board independence and credit ratings. Ratings are upgraded with an exogenous increase of board independence only when independence is low, which is consistent with the costs as well as benefits of having independent directors. Further analysis suggests that these costs may include the deficiency of the industrial expertise of independent directors, the cost of information acquisition for independent directors to become informed to monitor management, and the risk-taking incentive of these directors that may adversely affect the credit risk of a financially distressed firm.

Keywords: board independence, credit rating, board expertise, agency cost of debt, information acquisition, monitoring; advising, risk-taking

JEL Classification: G24, G34

Suggested Citation

Chen, Dong, The Non-monotonic Effect of Board Independence on Credit Ratings (August 10, 2014). Journal of Financial Services Research, 2014, vol. 45, issue 2, p145-171, Available at SSRN: or

Dong Chen (Contact Author)

University of Baltimore ( email )

1420 N. Charles Street
Baltimore, MD 21201
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics