IDEAS home Printed from https://ideas.repec.org/a/eee/advacc/v44y2019icp58-67.html
   My bibliography  Save this article

Cross-acceleration and the relationship between board independence and bond yield spreads

Author

Listed:
  • Meder, Anthony A.
  • Schwartz, Steven T.
  • Young, Richard

Abstract

This paper investigates the mediating effect of cross-acceleration provisions in bond debt on board independence and bond yield spreads. Cross-acceleration provisions cause bond debt to accelerate if other debt (mainly bank debt) is accelerated and allows bondholders to benefit from the monitoring of fellow creditors. Board independence, while generally seen as a positive governance feature, has been viewed as detrimental to bondholder interests when bondholder-shareholder conflicts are high. Cross-acceleration works to protect bondholder interests through increased likelihood of bankruptcy court supervision (or early repayment of debt). Consistent with this view, we find that when bondholder-shareholder conflict are high bonds issued without cross-acceleration provisions have yields that increase in board independence whereas bonds issued with cross-acceleration have yields that decrease in board independence. The results suggest that cross-acceleration plays a role in mitigating the tendency of more independent boards to favor shareholders when bondholder-shareholder conflicts arise.

Suggested Citation

  • Meder, Anthony A. & Schwartz, Steven T. & Young, Richard, 2019. "Cross-acceleration and the relationship between board independence and bond yield spreads," Advances in accounting, Elsevier, vol. 44(C), pages 58-67.
    • Handle: RePEc:eee:advacc:v:44:y:2019:i:c:p:58-67
    DOI: 10.1016/j.adiac.2018.12.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S088261101730175X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.adiac.2018.12.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    2. Milton Harris & Artur Raviv, 2008. "A Theory of Board Control and Size," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1797-1832, July.
    3. Assaf Eisdorfer, 2008. "Empirical Evidence of Risk Shifting in Financially Distressed Firms," Journal of Finance, American Finance Association, vol. 63(2), pages 609-637, April.
    4. Bipin Ajinkya & Sanjeev Bhojraj & Partha Sengupta, 2005. "The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 343-376, June.
    5. Armstrong, Christopher S. & Core, John E. & Guay, Wayne R., 2014. "Do independent directors cause improvements in firm transparency?," Journal of Financial Economics, Elsevier, vol. 113(3), pages 383-403.
    6. 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.
    7. Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
    8. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    9. Anderson, Ronald C. & Mansi, Sattar A. & Reeb, David M., 2004. "Board characteristics, accounting report integrity, and the cost of debt," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 315-342, September.
    10. Beatty, Anne & Liao, Scott & Weber, Joseph, 2012. "Evidence on the determinants and economic consequences of delegated monitoring," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 555-576.
    11. Irene Karamanou & Nikos Vafeas, 2005. "The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 453-486, June.
    12. Berger, Philip G. & Ofek, Eli & Swary, Itzhak, 1996. "Investor valuation of the abandonment option," Journal of Financial Economics, Elsevier, vol. 42(2), pages 257-287, October.
    13. repec:bla:jfinan:v:43:y:1988:i:2:p:397-412 is not listed on IDEAS
    14. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 7-26.
    15. K.J. Martijn Cremers & Vinay B. Nair & Chenyang Wei, 2007. "Governance Mechanisms and Bond Prices," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1359-1388, 2007 07.
    16. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    17. Roberts, Michael R. & Sufi, Amir, 2009. "Renegotiation of financial contracts: Evidence from private credit agreements," Journal of Financial Economics, Elsevier, vol. 93(2), pages 159-184, August.
    18. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, February.
    19. Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 283-306, June.
    20. Gilson, Stuart C & Vetsuypens, Michael R, 1993. "CEO Compensation in Financially Distressed Firms: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 48(2), pages 425-458, June.
    21. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    22. Rose-Ackerman, Susan, 1991. "Risk Taking and Ruin: Bankruptcy and Investment Choice," The Journal of Legal Studies, University of Chicago Press, vol. 20(2), pages 277-310, June.
    23. Sanjeev Bhojraj & Partha Sengupta, 2003. "Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors," The Journal of Business, University of Chicago Press, vol. 76(3), pages 455-476, July.
    24. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    2. Aman, Hiroyuki & Nguyen, Pascal, 2013. "Does good governance matter to debtholders? Evidence from the credit ratings of Japanese firms," Research in International Business and Finance, Elsevier, vol. 29(C), pages 14-34.
    3. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, January.
    4. Hui Liang James & Hongxia Wang, 2021. "Independent director tenure and dividends," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1057-1091, May.
    5. James, Hui Liang & Ngo, Thanh & Wang, Hongxia, 2021. "Independent director tenure and corporate transparency," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    6. Sugato Chakravarty & Chiraphol N. Chiyachantana & Christine Jiang, 2011. "THE CHOICE OF TRADING VENUE AND RELATIVE PRICE IMPACT OF INSTITUTIONAL TRADING: ADRs VERSUS THE UNDERLYING SECURITIES IN THEIR LOCAL MARKETS," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 34(4), pages 537-567, December.
    7. repec:csr:wpaper:1014 is not listed on IDEAS
    8. Ahmed, Anwer S. & Duellman, Scott, 2007. "Accounting conservatism and board of director characteristics: An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 411-437, July.
    9. Beng Wee Goh & Jimmy Lee & Jeffrey Ng & Kevin Ow Yong, 2016. "The Effect of Board Independence on Information Asymmetry," European Accounting Review, Taylor & Francis Journals, vol. 25(1), pages 155-182, May.
    10. Afzalur Rashid, 2015. "Revisiting Agency Theory: Evidence of Board Independence and Agency Cost from Bangladesh," Journal of Business Ethics, Springer, vol. 130(1), pages 181-198, August.
    11. Ahsan Habib & Md. Borhan Uddin Bhuiyan & Mostafa Monzur Hasan, 2018. "Firm life cycle and advisory directors," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 575-592, November.
    12. Shkendije Himaj, 2014. "Corporate Governance in Banks and its Impact on Risk and Performance: Review of Literature on the Selected Governance Mechanisms," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 3(3), pages 53-85.
    13. To, Thomas & Wu, Eliza & Zhao, Diya, 2024. "Global board reforms and corporate acquisition performance," Journal of Corporate Finance, Elsevier, vol. 87(C).
    14. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    15. Franco Ernesto Rubino & Paolo Tenuta & Domenico Rocco Cambrea, 2017. "Board characteristics effects on performance in family and non-family business: a multi-theoretical approach," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(3), pages 623-658, September.
    16. Crespí-Cladera, Rafel & Pascual-Fuster, Bartolomé, 2014. "Does the independence of independent directors matter?," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 116-134.
    17. Justin Law & Wayne Yu, 2018. "Corporate spinoffs and executive compensation," Frontiers of Business Research in China, Springer, vol. 12(1), pages 1-25, December.
    18. Bill B. Francis & Iftekhar Hasan & Qiang Wu, 2012. "Do corporate boards matter during the current financial crisis?," Review of Financial Economics, John Wiley & Sons, vol. 21(2), pages 39-52, April.
    19. Chen, Ming-Yuan, 2014. "Determinants of corporate board structure in Taiwan," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 62-78.
    20. Etienne Redor, 2016. "Board attributes and shareholder wealth in mergers and acquisitions: a survey of the literature," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(4), pages 789-821, December.
    21. Ruihao Ke & Meng Li & Yuan Zhang, 2020. "Directors' Informational Role in Corporate Voluntary Disclosure: An Analysis of Directors from Related Industries†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 392-418, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:advacc:v:44:y:2019:i:c:p:58-67. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/advances-in-accounting/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.