Controlling shareholders’ over-appointment of directors and the cost of debt financing

This study examines how controlling shareholders’ over-appointment of directors influences firms’ cost of debt financing in China’s weak institutional constraint environment. We develop a novel power-based measure of over-appointment that captures the actual control shareholders exert through the directors they appoint, accounting for variations in structural, ownership, and expert power. Using data from Chinese A-share-listed privately controlled firms from 2008 to 2023, we find that controlling shareholders’ over-appointment of directors significantly increases firms’ cost of debt financing. Specifically, firms with over-appointments incur approximately 6% to 7% higher financing costs than those without such over-appointments. Further analysis shows that this effect stems from two main motives, entrenching dominant control and extracting private benefits, and operates primarily through heightened tunneling risks perceived by creditors. However, when creditors hold more positive beliefs, such as optimism reflected in analysts’ forecasts, favorable credit ratings, or strong debt-paying capability, the adverse impact weakens. By introducing a power-based measure of excess board control, this study enhances understanding of how governance distortions affect financing costs and highlights the crucial roles of creditor trust and governance transparency in debt pricing in emerging markets.