Does Board Independence Reduce the Cost of Debt?

Financial Management, Volume 44, Issue 1, Pages 1–239, Spring 2015

45 Pages Posted: 6 Feb 2014 Last revised: 25 Mar 2016

See all articles by Michael Bradley

Michael Bradley

Duke University - Fuqua School of Business

Dong Chen

University of Baltimore

Date Written: June 3, 2014

Abstract

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 independent directors act in the interests of shareholders and 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

Bradley, Michael and Chen, Dong, Does Board Independence Reduce the Cost of Debt? (June 3, 2014). Financial Management, Volume 44, Issue 1, Pages 1–239, Spring 2015. Available at SSRN: https://ssrn.com/abstract=2390750 or http://dx.doi.org/10.2139/ssrn.2390750

Michael Bradley

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8006 (Phone)
919-660-7971 (Fax)

Dong Chen (Contact Author)

University of Baltimore ( email )

1420 N. Charles Street
Baltimore, MD 21201
United States

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