How Do Board Reforms Affect Debt Financing Costs around the World?

Abstract

In this study, we examine the effect of worldwide board reforms on the cost of debt financing. We find an overall increase in loan spreads in countries that initiate board reforms versus those without the reforms, which suggests that board reforms strengthen the power of shareholders at the cost of debtholders. The effect is larger for firms with greater inherent conflicts between shareholders and debtholders. Moreover, we find reform components related to board independence and separation of CEO and chairman lead to the increase of debt costs, whereas the component to improve audit committee independence help decrease debt costs.

Keywords: Board Reform, Cost of Debt, Shareholder-debtholder Conflicts

JEL Classification: G30, G32, G38, F34