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Board Characteristics, Accounting Report Integrity, and the Cost of Debt

43 Pages Posted: 15 Apr 2004 Last revised: 21 Apr 2014

Ronald C. Anderson

Temple University - Department of Finance

Sattar Mansi

Virginia Tech

David M. Reeb

National University of Singapore

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2003

Abstract

Creditor reliance on accounting-based debt covenants suggests that debtors are potentially concerned with board of director characteristics that influence the financial accounting process. In a sample of S&P 500 firms, we find that the cost of debt financing is inversely related to board independence and board size. We also examine the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process. We find that fully independent audit committees are associated with a significantly lower cost of debt financing. Similarly, yield spreads are also negatively related to audit committee size and the number of audit committee meetings. Overall, these results provide market-based evidence that boards and audit committees are important elements affecting the reliability of financial reports.

Keywords: Accounting process, debt covenants, audit committee composition, board composition, corporate governance, financial statements, accounting information

JEL Classification: M41, M49, K00, G12, G34

Suggested Citation

Anderson, Ronald C. and Mansi, Sattar and Reeb, David M., Board Characteristics, Accounting Report Integrity, and the Cost of Debt (November 15, 2003). Journal of Accounting & Economics (JAE), Vol. 37, No. 3, 2004. Available at SSRN: https://ssrn.com/abstract=491883 or http://dx.doi.org/10.2139/ssrn.491883

Ronald Craig Anderson

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

David M. Reeb

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

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