Bond Yield Spreads and Board of Director Characteristics: The Role of Cross-Acceleration

• In Event: Earnings Management and Market Reaction

Abstract

This study examines the relationship between board characteristics (size and independence) and bond yield spreads. Bond yield spreads have been shown to decrease in board independence and board size; we introduce cross-acceleration as the means by which bondholders derive the benefits of large, independent boards of directors. Prior research argues that bondholders reduce bond yield spreads for firms with large, independent boards since those boards produce higher quality financial statements that the bondholders use to verify covenants in the bond contract. However, bonds are diffusely held, have inflexible covenants and are difficult to renegotiate. Therefore, we argue that the negative relationship between large, independent boards and bond yield spreads is facilitated through cross-acceleration. We show that bond yield spread is decreasing in board independence for cross-accelerated bonds but not for non-cross-accelerated bonds.
 

Authors

• Anne Beatty, The Ohio State University

• Anthony Meder, Binghamton University, SUNY