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Does internal board monitoring affect debt maturity?

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Tosun, Onur and Senbet, Lemma W. (2020) Does internal board monitoring affect debt maturity? Review of Quantitative Finance and Accounting, 54 . pp. 205-245. doi:10.1007/s11156-018-00787-z ISSN 0924-865X.

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Official URL: https://doi.org/10.1007/s11156-018-00787-z

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Abstract

Using the Sarbanes–Oxley Act (SOX) as an exogenous shock to board structure, we identify internal monitoring via board independence and estimate its impact on corporate debt maturity. We introduce a triple difference-in-difference approach. Additionally, we use a simultaneous equations model and address that decisions about leverage and debt maturity are simultaneous. We also incorporate new debt issuance in the model to ensure the causality in the relation is from internal monitoring towards the maturity of new debt. The findings provide support for agency theory. As board independence increases, internal monitoring becomes stronger, and good governance substitutes for external control over managers through short-term debt. Subsequently, firms have more long-maturity debt. The results are robust to controlling for other internal monitoring mechanisms, CEO characteristics, financial constraints, cash, bond ratings, yield, and debt seniority. The impact of increased board independence on debt maturity is more significant for conglomerates and cases where there is a greater need for internal control over managers, such as CEO duality, high GIM index, straight debt, less strict covenants, high intangibility, high free cash flow, no majority blockholders, high discretionary accruals, or high real earnings management. In further analyses, we rule out the concern that our results are due to better reporting of internal controls through SOX Section 404 or an increase in auditors’ liability after SOX, rather than increased board independence.

Item Type: Journal Article
Alternative Title:
Subjects: H Social Sciences > HD Industries. Land use. Labor
Divisions: Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Corporate governance, Boards of directors
Journal or Publication Title: Review of Quantitative Finance and Accounting
Publisher: Springer New York LLC
ISSN: 0924-865X
Official Date: January 2020
Dates:
DateEvent
January 2020Published
19 January 2018Available
20 December 2018Accepted
Volume: 54
Page Range: pp. 205-245
DOI: 10.1007/s11156-018-00787-z
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access (Creative Commons)
Date of first compliant deposit: 15 January 2019
Date of first compliant Open Access: 21 February 2019
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