Corporate Boards and Bond Contract Terms

Abstract

I use the NYSE/NASD board independence reforms to study the effect of corporate boards on bond contract terms. Firms that transition to independent boards experience significant reductions in the use of payout, financing, and event risk covenants in their bond contracts. This effect is not offset by higher credit spreads. The contracting consequences of the board reforms are more pronounced in Delaware, where state law limits directors’ incentives to favor equity over debt, when firms are more vulnerable to takeovers, and when firms have fewer distracted directors. These results are consistent with the role of independent boards in promoting oversight of managers’ corporate policy choices, thereby reducing bondholders’ agency costs.

Keywords: Bond Covenants, Corporate Boards, Corporate Governance, Cost of Debt, Debt Contracting.

JEL Classification: G30, G32, G38, K22