Cross-Acceleration, Board Independence, and Bond Yield Spreads

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Abstract

This study examines the relationship between board independence and bond yield spreads when the bond contract includes cross-acceleration. Early research about bond yield spreads and board independence show that bondholders reduce bond yield spreads for firms with independent boards. Those boards produce higher quality financial statements that the bondholders may use to verify covenants in the bond contract. However, bonds are diffusely held, have inflexible covenants and are difficult to renegotiate, all of which hinder the usefulness of bond covenants. In addition, more recent research shows a conditional relationship between bond yield spreads and board independence. This study argues that the negative relationship between spreads and independence is consistent when the bond includes cross-acceleration. Results here show that bond yield spread is decreasing in board independence for cross-accelerated bonds but not for non-cross-accelerated bonds.

Author

• Anthony Meder, SUNY-Binghamton