Does Board Independence Reduce the Cost of Debt?

Abstract

Using the passage of the Sarbanes-Oxley Act and the associated changes 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 is low, it increases the cost of debt when credit conditions are poor or leverage is 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 stakeholder groups.

Why do large shareholders adopt a short‐term versus a long‐term investment horizon in different firms?

“…One potential way to mitigate the endogeneity issue regarding the relation between board independence and shortterm (long-term) blockholding investments is to conduct a DID test based on SOX and following SEC rules. Recent studies including Bradley and Chen (2015) and Tosun (2018) Table 3 reports the results consistent with the original findings. In particular, Noncompliant*Post has statistically significant and negative (positive) estimates for the number and ownership of short-term (long-term) blockholding investments.…”

Corporate Social Responsibility (CSR) and Risk Taking: Evidence from Indonesia

“…This is due to female directors are more independent and selective in risk taking. Bradley and Chen (2014) find that independent female directors lower corporate risks that will benefit shareholders. Leverage (LEV) measures how much a company is financed by debt.…”

Corporate Governance and Firm Risk: Evidence from Malaysian Shariah Compliance Companies

“…On the other hand, Ni and Purda (2012) in their study concluded that greater board independence in the board would result in lower degree of operating risk. Bradley and Chen (2015) suggested that cost of debt would be decrease accordingly in increasing board independence considering when level of operating leverage is low.…”