On executives of financial institutions as outside directors

We find that the presence of commercial bankers on the board is positively related to aggregate firm debt. Separating by type of debt, the presence of commercial bankers on the board is positively related to short-term, long-term, and total bank debt. We also find that while the presence of unaffiliated commercial bankers on the board is positively related to bank borrowing, the presence of affiliated commercial bankers on the board is not. The results are consistent with the theory that commercial bankers supply bank debt market expertise, but not with the theory that they sit on boards to monitor lending relationships.     

Bankers on the board and the debt ratio of firms

We investigate the impact that bankers on the board have upon a firm's debt ratio, debt to total capital, 1 year subsequent to their appointment. We find that the presence of lending bankers on a firm's board negatively affects the debt ratio, while the impact of non-lending bankers varies with the firm's probability of financial distress. The results suggest that non-lending bankers provide expertise and certification for distressed firms while exercising a monitoring role for non-distressed firms. In contrast, the results suggest that lenders on the board exercise a monitoring role independent of the firm's financial distress. When combined with established findings in the literature, we conclude that there may be two ways to avoid conflict between a board-appointed banker's fiduciary responsibility and the interests of her bank. When the potential for conflict is high, lenders may forgo board positions, while non-lending bankers may merely alter their role on the board.     

Who selects the ‘right’ directors? An examination of the association between board selection,gender diversity and outcomes

Using a sample of companies from the top 500 listed firms in Australia, we investigate whether the presence of a designated nomination committee and female representation on the nomination committee affect board gender diversity. We also examine whether gender diversity on the board affects firm risk and financial performance. We find that board gender diversity is significantly and positively associated with the presence of a designated nomination committee and that female representation on the nomination committee is a significant explanatory factor of increasing board gender diversity following the release of the 2010 Australian Securities Exchange Corporate Governance Council (ASXCGC) recommendations. Further, our results support the business case for board gender diversity as we find greater gender diversity moderates excessive firm risk which in turn improves firms' financial performance. Our results are robust after correcting for selection bias and controlling for other board, firm and industry characteristics.     

Monitoring by Affiliated Bankers on Board of Directors: Evidence from Corporate Financing Outcomes

Using a hand‐collected data set on boards of directors of large US nonfinancial companies, this paper investigates the effects of the presence of a creditor on a company's board. The results suggest that the presence of a creditor: 1) increases the amount of debt in a company's capital structure via an increase in private debt, 2) decreases the sensitivity of debt financing to the amount of tangible assets that a company holds, 3) decreases the cost of borrowing, and 4) reduces the pledge of collateral and financial covenants in debt contracts.     

Board quality and the cost of debt capital: The case of bank loans

We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms that have higher quality boards with a greater advisory presence borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection, as well as the size and financial characteristics of the borrower and of the loan. We also show evidence that board quality and other governance characteristics influence the likelihood that loans have covenant requirements, but the relations differ by covenant type. When we combine the direct and indirect costs of bank loans we find that firms with large, independent, experienced, and diverse boards and lower institutional ownership borrow more cheaply. Overall, the evidence indicates that board quality impacts the cost of bank debt.     

Does Board Independence Reduce the Cost of Debt?

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.     

Governance,efficiency and risk taking in Chinese banking

We employ a hand-collected unique dataset on banks operating in China between 2003 and 2011 to investigate the impact of board governance features (size, composition and functioning) on bank efficiency and risk taking. Our evidence suggests that board characteristics tend to have a greater influence on banks' profit and cost efficiency than on loan quality. We find that the proportion of female directors on the board appears not only to be linked to higher profit and cost efficiency but also to lower traditional banking risk. Similarly, board independence is associated with higher profit efficiency of banks; while the opposite is found for executive directors and in the presence of dual leadership of the CEO/chairperson. Among the control variables, we found that liquidity negatively affects profit and cost efficiency, while positively affecting risk. Interestingly, we find some evidence of an incremental effect of specific board characteristics on efficiency for banks with more concentrated ownership structures and state-owned institutions; while for banks with CEO performance-related pay schemes the effect on efficiency when significant is usually negative. Our results offer useful insights to policy makers in China charged with the task of improving the governance mechanisms in banking institutions.     

Causes and Consequences of Improvements in the Information Environment for Swedish Small and Mid-Sized Firms

We investigate improvements in the information environment and financing decisions for Swedish small and mid-sized firms. These firms are required to file audited annual reports. We create an index capturing accounting standards choices, auditor quality, and board size reflecting information environment improvements. We find an association between increased short-term financing and information environment improvements: The most common actions are to switch to a Big 4 auditor or a chartered accountant and to add independent board members as opposed to changing the accounting standards used. These improvements are associated with a switch to long-term debt and a reduction of cost of debt. Our findings are relevant for the ongoing discussion on accounting regulation for private firms both in the USA and Europe since they show that (Swedish) private firms use other ways to improve the information environment in order to access to less costly long-term bank debt besides adopting International Financial Reporting Standards.     

Board reforms and debt choice

In this study, we examine the impact of board reforms on the choice between bank and public debt. Using a large sample of firm-year observations from 29 countries and a difference-in-difference setting, we find that major board reforms lead to a decrease in bank debt ratio, particularly in companies where bank debt is used for monitoring purposes, suggesting that bank debt and board reforms are substitutes for monitoring managers' actions. We also find that board reforms' adoption is associated with a facilitated access to alternative financing sources with better terms than bank debt. In an additional analysis, we show that the decrease in bank debt ratio is stronger for firms with higher information opacity and those in countries with strong institutional environment. More importantly, we provide evidence that the decrease in bank debt post-reform increases firm value, indicating that the substitution between bank monitoring and board monitoring is a value-enhancing decision. Taken collectively, we conclude that the need for bank monitoring is endogenously determined by the strength of alternative governance mechanisms (i.e. board governance).     

The unintended consequence of collateral-based financing: Evidence from corporate cost behavior

This paper examines how real estate appreciation correspondingly changes collateral value, which affects debt structure choices and consequent operating decisions. Specifically, we explore whether collateral-based financing provides a link between real estate values and corporate cost behavior. Our baseline results show that an appreciation of a firm’s real estate assets alleviates its cost stickiness. A further analysis shows that this influence is stronger for firms with less prior bank debt, less dependence on external financing, and a lower leverage ratio. We also observe that the impact of collateral shocks on cost stickiness is more pronounced when selling, general and administrative (SG&A) costs create less future value for mature firms and for firms with weaker external governance. Collectively, our results support the argument that an increase in bank debt arising from collateral value appreciation mitigates agency problems and thus lessens cost stickiness.     

Multiple corporate governance attributes and the cost of capital – Evidence from Germany

This paper investigates the extent to which corporate governance affects the cost of debt and equity capital of German exchange-listed companies. I examine corporate governance along three dimensions: financial information quality, ownership structure and board structure. The results suggest that firms with high levels of financial transparency and bonus compensations face lower cost of equity. In addition, block ownership is negatively related to firms' cost of equity when the blockholders are other firms, managers or founding-family members. Consistent with the conjecture that agency costs increase with firm size, I find significant cost of debt effects only in the largest German companies. Here, the creditors demand lower cost of debt from firms with block ownerships held by corporations or banks. My findings demonstrate that a uniform set of governance attributes is unlikely to satisfy suppliers of debt and equity capital equally.     

Complementary relationship between female directors and financial literacy in deterring earnings management: The case of high-technology firms

We explore whether the presence of female directors on the boards of high-technology firms has an impact on the boards' monitoring and oversight of earnings management. Using difference-in-difference analyses, we utilize an exogenous change in Israel to examine the changes in, and the effects of, female director representation in constraining earnings management in a changing accounting environment that increased managers' ability to report earnings opportunistically. We find that a high representation of women on the board does not make an incremental contribution to the explanation of earnings management over and above the presence of a female director with financial literacy. However, the presence of one financially literate female director on the board does have a significant effect on restraining earnings management. Moreover, financially literate female directors are more effective than their financially literate male counterparts in deterring earnings management. Our results are robust to controlling for firm characteristics related to the selection of a woman to participate on the BOD as well as to the selection of a financially literate woman in particular. We conclude that financial literacy is complementary to female representation on the board in constraining earnings management. An important economic implication of our findings is that a regulatory move to increase the representation of women on corporate BODs should refer specifically to the inclusion of at least one woman with financial literacy on the board.     

Do Family Firms’ Specific Governance Mechanisms Moderate the Cost of Debt?

This study considers whether the specific governance mechanisms of Spanish family firms decrease their debt cost. We explore the idea of reducing debt costs through specific governance mechanisms of family firms, such as the business succession plan, the family council, as well as other traditional mechanisms like the board of directors. Because most corporate governance research has focused on larger firms, more research on smaller privately held family firms is necessary. For this empirical research, we used a sample of 281 small and medium‐sized family firms. The results show that the implementation of a business succession plan not only serves to solve family conflicts and to plan the business succession but also moderates the cost of financing. Our results confirm that credit institutions receive a positive signal when family firms implement business succession plans as governance mechanisms, reducing both family opportunism and asymmetries of information, influencing risk analysts in their decision‐making processes.     

Classified boards,the cost of debt,and firm performance

This paper documents that classified boards substantially reduce the cost of debt. The evidence is not consistent with the argument that bondholders benefit from board classification because they are concerned about hostile takeovers. Instead, the results suggest that the lessened concern for takeovers associated with a classified board structure reduces managerial risk-taking, and increases managerial incentive for financial disclosure, with both effects inuring to bondholders’ benefit. Consistent with prior literature, classified boards on average are associated with a lower firm performance. However, under the circumstances that the agency conflict between shareholders and bondholders is severe, the performance effect of classified boards appears benign.     

Why do corporate managers misstate financial statements? The role of option compensation and other factors

We investigate the incentives that led to the rash of restated financial statements at the end of the 1990s market bubble. We find that the likelihood of a misstated financial statement increases greatly when the CEO has very sizable holdings of in-the-money stock options. Misstatements are also more likely for firms that are constrained by an interest-coverage debt covenant, that raise new debt or equity capital, or that have a CEO who serves as board chair. Our results indicate that agency costs increased [Jensen, M.C., 2005a, Agency costs of overvalued equity. Financial Management 34, 5–19] as substantially overvalued equity caused managers to take actions to support the stock price.     

Financial statement comparability,state ownership,and the cost of debt: Evidence from China

This study examines whether financial statement comparability (comparability) reduces credit risk and lowers the cost of debt. We hypothesize and document that higher comparability reduces information asymmetry and noise in debt contracting and makes monitoring of managerial activities easier, which reduces the cost of debt. However, the effect of comparability on the cost of debt for state-owned enterprises (SOEs) is insignificant. The results also suggest that competitive pressure and audit quality complement the relationship between comparability and the cost of debt. Our findings remain robust after controlling for endogeneity and in numerous empirical specifications. Overall, our results indicate that greater comparability improves credit decisions of the lenders and also benefits borrowers by reducing the financing cost.     

The Priority Structure of Corporate Liabilities

Most discussions of corporate capital structure effectively assume that all debt is the same. Yet debt differs by maturity, covenant restrictions, conversion rights, call provisions, and priority. Here, we examine priority structure across a sample of 4995 COMPUSTAT industrial firms from 1981 to 1991. We analyze the variation in the use of capital leases, secured debt, ordinary debt, subordinated debt, and preferred stock both as a fraction of the firm's market value and as a fraction of total fixed claims. Our evidence provides consistent support for contracting cost hypotheses, mixed support for tax hypotheses, and little support for the signaling hypothesis.     

Corporate tax aggressiveness,outside directors,and debt policy: An empirical analysis

This study examines the influence of corporate tax aggressiveness on corporate debt policy (the debt-substitution effect) and the influence of outside directors on both debt and the debt-substitution effect. Based on a sample of 6967 firm-year observations over the 2001–2010 period, we find that tax aggressiveness is negatively correlated with debt. We also observe a negative correlation between debt and the proportion of outside directors on the board, and find that outside directors magnify the debt-substitution effect. Finally, we obtain similar results in analysis based on firms' debt issuance decisions.     

How female directors help firms to attain optimal cash holdings

Is female board representation helpful for firms attaining optimal cash holdings? We address this question using data on 1163 US-listed firms for 2000‐–2017. We show that if there are more female directors on firm boards, ceteris paribus, there is no effect on excess cash holdings implying that female directors are not inclined to be particularly cautious or optimistic. However, in the presence of overly confident CEOs, having more female directors on the board counteracts the tendency of such CEOs to reduce cash holding below an optimal level. Thus, female board representation enhances corporate decision making through effective monitoring and thus, taming CEOs' biased behavior.     

Lease Financing and Corporate Governance

Lease financing is a well‐recognized mechanism for reducing the agency costs of debt. This study examines whether firms that attempt to control the agency costs of equity through strong governance structures, including Chief Executive Officer compensation alignment and board structure, are more likely to use an agency cost reducing debt structure, such as leasing. For a sample of large firms, we find that firms who use more incentive compensation and have more outside directors also tend to use more lease financing, suggesting these agency cost reducing measures are complements.