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The Non-monotonic Effect of Board Independence on Credit Ratings

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  • Dong Chen

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Abstract

Using the Sarbanes-Oxley Act of 2002 as a natural experiment, we document a non-monotonic relation between board independence and credit ratings. Ratings are upgraded with an exogenous increase of board independence only when independence is low, which is consistent with the costs as well as benefits of having independent directors. Further analysis suggests that these costs may include the deficiency of the industrial expertise of independent directors, the cost of information acquisition for independent directors to become informed to monitor management, and the risk-taking incentive of these directors that may adversely affect the credit risk of a financially distressed firm. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Dong Chen, 2014. "The Non-monotonic Effect of Board Independence on Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(2), pages 145-171, April.
  • Handle: RePEc:kap:jfsres:v:45:y:2014:i:2:p:145-171
    DOI: 10.1007/s10693-012-0158-7
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    Cited by:

    1. repec:kap:jfsres:v:52:y:2017:i:3:d:10.1007_s10693-016-0252-3 is not listed on IDEAS
    2. Michael Bradley & Dong Chen, 2015. "Does Board Independence Reduce the Cost of Debt?," Financial Management, Financial Management Association International, vol. 44(1), pages 15-47, March.

    More about this item

    Keywords

    Board independence; Credit rating; Board expertise; Agency cost of debt; Information acquisition; Monitoring; Advising; Risk-taking; JEL classification; G24; G34;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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