Board Structure and Bondholder Agency Risk: New Evidence from Board Reforms
60 Pages Posted: 10 Aug 2019 Last revised: 11 Jan 2020
Date Written: January 6, 2020
Does the structure of corporate boards affect bondholder agency risk? Using mandatory board reforms, I show that firms that transition to independent boards experience economically significant reductions in payout, financing, and event risk covenants in their bond contracts. This effect is not offset by a higher cost of debt. My findings also reveal that the contracting consequences of the reforms are particularly pronounced in Delaware, where state law limits directors’ incentives to favor equity over debt, when firms are more vulnerable to takeovers, and when firms have fewer distracted directors. These results suggest that independent boards can contribute to ameliorating bondholder agency risk.
Keywords: Corporate Boards, Bond Covenants, Corporate Governance, Debt Contracting
JEL Classification: D82, G30, G32, G34
Suggested Citation: Suggested Citation