Independent Directors,Business Risk,and the Informativeness of Accounting Earnings for Debt Contracting

Using a sample of new bank loans, we investigate the impact of business risk on the usefulness of operating income after controlling for the proportion of independent directors. Consistent with the literature, our initial analyses reveal that the presence of independent directors on a board reduces the interest rate directly and indirectly through an increase in the usefulness of operating income. However, we further provide evidence that the indirect benefit of a high proportion of independent directors is reduced when we account for the presence of business risk. This suggests that studies examining the usefulness of operating income should take into account the effect of business risk. © 2018 ASAC. Published by John Wiley & Sons, Ltd.