Hostname: page-component-745bb68f8f-grxwn Total loading time: 0 Render date: 2025-02-01T03:40:30.710Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  12 August 2022

Hui (Zhao) Chiu ,
Chen Lin  and
Lai Wei Open the ORCID record for Lai Wei [Opens in a new window]
Hui (Zhao) Chiu
Affiliation:
Guangxi University China-ASEAN Research Institute, The University of Hong Kong Faculty of Business and Economics, Tsinghua University School of Social Sciences aseanzhao@126.com
Chen Lin
Affiliation:
The University of Hong Kong Faculty of Business and Economics chenlin1@hku.hk
Lai Wei*
Affiliation:
Lingnan University Faculty of Business
*
laiwei2@ln.edu.hk (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

In this study, we examine the effect of worldwide board reforms on the cost of debt financing. We document an increase of loan spread after a country initiates the reform. The increase is larger among firms that are more exposed to shareholder–debtholder conflicts. The results suggest that board reforms empower shareholders at the cost of debtholders. However, we also find that, while the reform component related to board independence leads to the increase in the cost of debt, the component related to audit committee independence helps decrease the cost.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 217 - 249
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to Hendrik Bessembinder (the editor) and two anonymous referees for their helpful comments and suggestions. The work described in this paper was partially supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China (Project No. T35/710/20R). Chiu acknowledges the financial support from the China National Social Science Youth Fund Project (No. 19CJL048).

References

Aghion, P., and Bolton, P.. “An Incomplete Contracts Approach to Financial Contracting.” Review of Economic Studies, 59 (1992), 473–494.CrossRefGoogle Scholar
Aivazian, V. A.; Booth, L.; and Cleary, S.. “Dividend Smoothing and Debt Ratings.” Journal of Financial and Quantitative Analysis, 41 (2006), 439–453.CrossRefGoogle Scholar
Anderson, R. C.; Mansi, S. A.; and Reeb, D. M.. “Board Characteristics, Accounting Report Integrity, and the Cost of Debt.” Journal of Accounting and Economics, 37 (2004), 315–342.CrossRefGoogle Scholar
Armstrong, C. S.; Guay, W. R.; and Weber, J. P.. “The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting.” Journal of Accounting and Economics, 50 (2010), 179–234.CrossRefGoogle Scholar
Bae, K. H., and Goyal, V. K.. “Creditor Rights, Enforcement, and Bank Loans.” Journal of Finance, 64 (2009), 823–860.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.CrossRefGoogle Scholar
Barth, J. R.; Caprio, G.; and Levine, R.. “Bank Regulation and Supervision in 180 Countries from 1999 to 2011.” Journal of Financial Economic Policy, 5 (2013), 111–219.CrossRefGoogle Scholar
Bebchuk, L. A., and Weisbach, M. S.. “The State of Corporate Governance Research.” Review of Financial Studies, 23 (2010), 939–961.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.CrossRefGoogle Scholar
Bhattacharya, U., and Daouk, H.. “The World Price of Insider Trading.” Journal of Finance, 57 (2002), 75–108.CrossRefGoogle Scholar
Bradley, M., and Roberts, M. R.. “The Structure and Pricing of Corporate Debt Covenants.” Quarterly Journal of Finance, 5 (2015), 1–37.CrossRefGoogle Scholar
Brockman, P.; Martin, X.; and Unlu, E.. “Executive Compensation and the Maturity Structure of Corporate Debt.” Journal of Finance, 65 (2010), 1123–1161.CrossRefGoogle Scholar
Carcello, J. V., and Neal, T. L.. “Audit Committee Composition and Auditor Reporting.” Accounting Review, 75 (2000), 453–467.10.2308/accr.2000.75.4.453CrossRefGoogle Scholar
Chaney, T.; Sraer, D.; and Thesmar, D.. “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment.” American Economic Review, 102 (2012), 2381–2409.CrossRefGoogle Scholar
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.10.1111/j.1540-6261.2008.01391.xCrossRefGoogle Scholar
Chava, S.; Livdan, D.; and Purnanandam, A.. “Do Shareholder Rights Affect the Cost of Bank Loans?” Review of Financial Studies, 22 (2009), 2973–3004.CrossRefGoogle Scholar
Chava, S.; Kumar, P.; and Warga, A.. “Managerial Agency and Bond Covenants.” Review of Financial Studies, 23 (2009), 1120–1148.CrossRefGoogle Scholar
Chava, S.; Rui, W.; and Hong, Z.. “Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies.” Journal of Financial and Quantitative Analysis, 54 (2019), 481–512.10.1017/S002210901800090XCrossRefGoogle Scholar
Christensen, H. B., and Nikolaev, V. V.. “Capital Versus Performance Covenants in Debt Contracts.” Journal of Accounting Research, 50 (2012), 75–116.CrossRefGoogle Scholar
Cremers, K. J. M.; Nair, V. B.; and Wei, C.. “Governance Mechanisms and Bond Prices.” Review of Financial Studies, 20 (2007), 1359–1388.CrossRefGoogle Scholar
DeAngelo, H., and Roll, R.. “How Stable are Corporate Capital Structures?” Journal of Finance, 70 (2015), 373–418.CrossRefGoogle Scholar
Dechow, P. M.; Sloan, R. G.; and Sweeney, A. P.. “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC.” Contemporary Accounting Research, 13 (1996), 1–36.CrossRefGoogle Scholar
DeFond, M. L., and Hung, M.. “Investor Protection and Corporate Governance: Evidence from Worldwide CEO Turnover.” Journal of Accounting Research, 42 (2004), 269–312.CrossRefGoogle Scholar
DeFond, M.; Hung, M.; and Trezevant, R.. “Investor Protection and the Information Content of Annual Earnings Announcements: International Evidence.” Journal of Accounting and Economics, 43 (2007), 37–67.CrossRefGoogle Scholar
Easley, D., and O’Hara, M.. “Information and the Cost of Capital.” Journal of Finance, 59 (2004), 1553–1583.CrossRefGoogle Scholar
Fama, E. F., and Jensen, M. C.. “Separation of Ownership and Control.” Journal of Law and Economics, 26 (1983), 301–325.CrossRefGoogle Scholar
Fauver, L.; Hung, M.; Li, X.; and Taboada, A. G.. “Board Reforms and Firm Value: Worldwide Evidence.” Journal of Financial Economics, 125 (2017), 120–142.CrossRefGoogle Scholar
Graham, J. R.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 44–61.CrossRefGoogle Scholar
Hail, L.; Sikes, S.; and Wang, C.. “Cross-Country Evidence on the Relation Between Capital Gains Taxes, Risk, and Expected Returns.” Journal of Public Economics, 151 (2017), 56–73.CrossRefGoogle Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H.. “Beauty is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans.” Journal of Financial Economics, 113 (2014), 109–130.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “Board of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 9 (2003), 7–26.Google Scholar
Hertzel, M. G., and Officer, M. S.. “Industry Contagion in Loan Spreads.” Journal of Financial Economics, 103 (2012), 493–506.CrossRefGoogle Scholar
Huang, R. B., and Ritter, J. R.. “Corporate Cash Shortfalls and Financing Decisions.” Review of Financial Studies, 4 (2021), 1789–1883CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Kaufmann, D.; Kraay, A.; and Mastruzzi, M.. “Governance Matters VIII: Aggregate and Individual Governance Indicators 1996–2008.” World Bank Policy Research Working Paper No. 4978 (2009).CrossRefGoogle Scholar
Kim, E. H., and Lu, Y.. “Corporate Governance Reforms around the World and Cross-Border Acquisitions.” Journal of Corporate Finance, 22 (2013), 236–253.CrossRefGoogle Scholar
Klock, M. S.; Mansi, S. A.; and Maxwell, W. F.. “Does Corporate Governance Matter to Bondholders?” Journal of Financial and Quantitative Analysis, 40 (2005), 693–719.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Agency Problems and Dividend Policies around the World.” Journal of Finance, 55 (2000), 1–33.CrossRefGoogle Scholar
Lel, U., and Miller, D. P.. “Does Takeover Activity Cause Managerial Discipline? Evidence from International M&A Laws.” Review of Financial Studies, 28 (2015), 1588–1622.CrossRefGoogle Scholar
Masulis, R. W., and Mobbs, S.. “Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?” Journal of Financial Economics, 111 (2014), 406–429.CrossRefGoogle Scholar
Masulis, R. W.; Wang, C.; and Xie, F.. “Globalizing the Boardroom – The Effects of Foreign Directors on Corporate Governance and Firm Performance.” Journal of Accounting and Economics, 53 (2012), 527–554.CrossRefGoogle Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Nini, G.; Smith, D. C.; and Sufi, A.. “Creditor Control Rights and Firm Investment Policy.” Journal of Financial Economics, 92 (2009), 400–420.CrossRefGoogle Scholar
Pan, Y.; Wang, T. Y.; and Weisbach, M. S.. “How Management Risk Affects Corporate Debt.” Review of Financial Studies, 31 (2018), 3491–3531.CrossRefGoogle Scholar
Qian, J., and Strahan, P. E.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 2803–2834.CrossRefGoogle Scholar
Rajan, R. G. “Insiders and Outsiders: The Choice Between Informed and Arm’s Length Debt.” Journal of Finance, 47 (1992), 1367–1400.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know about Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.CrossRefGoogle Scholar
Rajan, R., and Zingales, L.. “Financial Development and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Shleifer, A., and Vishny, R. W.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Supplementary material: PDF

(Zhao) Chiu et al. supplementary material

Online Appendix

Download (Zhao) Chiu et al. supplementary material(PDF)
PDF 277.5 KB