Cross-Acceleration, Board Independence, and Bond Yield Spreads.

• In Event: GAAP, Accounting Numbers, and Stock Returns

Abstract

Cross-acceleration in bond covenants trigger the bond debt to accelerate if other debt is accelerated. Cross-acceleration allows bondholders to benefit from the monitoring of other creditors, mainly banks. Banks are better monitors due to their less dispersed ownership of debt and their greater investment in monitoring capabilities. Prior research has found that bonds with cross-acceleration provisions have lower yield spreads than otherwise similar bond issues. This paper investigates the mediating effect of board independence in the presence of cross-acceleration. Bonds issued with cross-acceleration provisions have yield spreads that decrease in board independence while bonds issued without cross-acceleration have yield spreads that increase in board independence. The results suggest that cross-acceleration plays a role in mitigating the tendency of more independent boards to favor shareholders over bond holders during times of financial distress

Authors

• Anthony Meder, SUNY-Binghamton

• Steven Schwartz, Binghamton University

• Richard A Young, Ohio State University