Board Effectiveness and Cost of Debt
BUSINESS RESEARCH METHODOLOGY
BOARD EFFECTIVENESS AND COST OF DEBT by : FARUQ AKURAT
100810251004
ECONOMIC FACULTY
JEMBER UNIVERSITY
2011 / 2012
Board Effectiveness and Cost of Debt
ABSTRACT Does the board of directors influence cost of debt financing? This study of a sample of Spanish listed companies during the period 2004–2007 provides some evidence about the question. The results suggest that two board attributes – director ownership and board activity – appear to influence in the risk assessment of debtholders because of their ability to reduce agency cost and information asymmetry. We also find a non-linear relationship between board size and cost of debt, suggesting that from certain levels the benefits of large boards may be outweighed by the cost of poorer communication and increased decision-making time. Previous Literature and Hypotheses
Some studies have specifically addressed the effect of the board of directors on the cost of debt financing (Anderson et al., 2004; Ashbaugh-Skaife et al., 2006; Bhojraj and Sengupta, 2003; Ertugrul and Hegde, 2008; Piot and Missonier-Piera, 2007). Their results are consistent with the argument that debtholders favour monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness as a source of greater assurance with respect to the integrity of accounting numbers, so improving the financial accounting process. Therefore, the quality of monitoring corporate governance devices may mitigate debtholders’ risk and, consequently these creditors allow a reduction in their risk premium.
Board Independence.
The literature has generally posited that independence of the board of directors from management provides effective monitoring and control of firm activities (i.e. Fama and Jensen, 1983). However, a second view is that independent directors may be ineffective, either because they are appointed by company managers or because the board culture
BOARD EFFECTIVENESS AND COST OF DEBT by : FARUQ AKURAT
100810251004
ECONOMIC FACULTY
JEMBER UNIVERSITY
2011 / 2012
Board Effectiveness and Cost of Debt
ABSTRACT Does the board of directors influence cost of debt financing? This study of a sample of Spanish listed companies during the period 2004–2007 provides some evidence about the question. The results suggest that two board attributes – director ownership and board activity – appear to influence in the risk assessment of debtholders because of their ability to reduce agency cost and information asymmetry. We also find a non-linear relationship between board size and cost of debt, suggesting that from certain levels the benefits of large boards may be outweighed by the cost of poorer communication and increased decision-making time. Previous Literature and Hypotheses
Some studies have specifically addressed the effect of the board of directors on the cost of debt financing (Anderson et al., 2004; Ashbaugh-Skaife et al., 2006; Bhojraj and Sengupta, 2003; Ertugrul and Hegde, 2008; Piot and Missonier-Piera, 2007). Their results are consistent with the argument that debtholders favour monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness as a source of greater assurance with respect to the integrity of accounting numbers, so improving the financial accounting process. Therefore, the quality of monitoring corporate governance devices may mitigate debtholders’ risk and, consequently these creditors allow a reduction in their risk premium.
Board Independence.
The literature has generally posited that independence of the board of directors from management provides effective monitoring and control of firm activities (i.e. Fama and Jensen, 1983). However, a second view is that independent directors may be ineffective, either because they are appointed by company managers or because the board culture