Creditor reliance on accounting-based debt covenants suggests that debtors are potentially concerned with board of director characteristics that influence the financial accounting process. In a sample of S&P 500 firms, we find that the cost of debt financing is inversely related to board independence and board size. We also examine the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process. We find that fully independent audit committees are associated with a significantly lower cost of debt financing. Similarly, yield spreads are also negatively related to audit committee size and the number of audit committee meetings. Overall, these results provide market-based evidence that boards and audit committees are important elements affecting the reliability of financial reports.

Board Characteristics, Accounting Report Integrity, and the Cost of Debt

Founding family ownership and the agency cost of debt

Board characteristics, accounting report integrity, and the cost of debt

We investigate the impact of founding-family ownership structure on the agency cost of debt. We find that founding-family ownership is common in large, publicly traded firms and is related, both statistically and economically, to a lower cost of debt financing. The evidence also indicates that the relation between founding-family holdings and debt costs is non-monotonic; debt costs first decrease as family ownership increases but then increase with increasing family ownership. However, irrespective of the level of family holdings, we find that family firms enjoy a lower cost of debt than non-family firms. These results are consistent with the hypothesis that continued founding-family ownership in publicly traded firms reduces the agency costs of debt. Additional analysis reveals that when a family member serves as the firm's CEO, the cost of debt financing is higher than if an outsider is CEO, but still lower than in non-family firms. Overall, the results are consistent with the idea that founding-family firms have incentive structures that result in fewer agency conflicts between equity and debt claimants, suggesting that bond investors view founding-family ownership as an organizational structure that better protects their interests.

Founding Family Ownership and the Agency Cost of Debt

The controversial findings of both high and low performance for family-controlled public firms offer a unique context in which to study the moderating role of high-performance work systems (HPWS) on founding-family ownership effects. In a sample of Taiwan-based public firms, founding-family ownership was found not to be associated with firm performance. However, when the level of HPWS facing family ownership was accounted for, the results showed that the relationship between founding-family ownership and firm performance is significantly negative for companies with lower levels of HPWS but is significantly positive for companies with higher levels of HPWS.

Founding-Family Ownership and Firm Performance The Role of High-Performance Work Systems

Recent research suggests that firm internationalization is associated with greater exchange rate risk and a higher cost of equity capital. However, there is no research on the relation between the level of firm international activity and the cost of debt financing. This study offers the first such empirical evidence using non-provisional public debt. Based on a sample of 2,194 U.S. firm-year observations, we find that firms with greater levels of international activity have better credit ratings. We also find that the cost of debt financing is inversely related to the degree of firm internationalization beyond that incorporated in credit ratings. These results suggest that rating agencies do not fully incorporate firm international activity in their analysis resulting in a downward bias in credit ratings for international firms. In aggregate, the results imply that failing to incorporate firm international activity in debt pricing leads to potential omitted variable problems.

Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt

Recent research suggests that firm internationalization is associated with greater exchange rate risk and a higher cost of equity capital. However, there is no research on the relation between the level of firm international activity and the cost of debt financing. This study of? fers the first such empirical evidence using non-provisional public debt. Based on a sample of 2,194 U.S. firm year observations, we find that firms with greater levels of international activity have better credit ratings. We also find that the cost of debt financing is inversely related to the degree of firm internationalization beyond that incorporated in credit ratings. These results suggest that rating agencies do not fully incorporate firm international activ? ity in their analysis resulting in a downward bias in credit ratings for international firms. In aggregate, the results imply that failing to incorporate firm international activity in debt pricing leads to potential omitted variable problems.

John G. Allee

Papers

Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt

Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt