47 Pages Posted: 19 Jul 2010 Last revised: 3 Jun 2014
Date Written: February 4, 2014
Using the passage of the Sarbanes-Oxley Act and the associated change in listing standards as a natural experiment, we find that while board independence decreases the cost of debt when credit conditions are strong or leverage low, it increases the cost of debt when credit conditions are poor or leverage high. We also document that independent directors set corporate policies that increase firm risk. These results suggest that, acting in the interest of shareholders, independent directors are increasingly costly to bondholders with the intensification of the agency conflict between these two stakeholders.
Keywords: corporate governance, Sarbanes-Oxley Act, board independence, risk-taking, credit condition, leverage, bondholder/shareholder conflict, cost of debt, propensity score
JEL Classification: G34, K22
Suggested Citation: Suggested Citation