Co-opted boards and capital structure dynamics

Date

2021-06-25

Advisors

Journal Title

Journal ISSN

ISSN

1059-0560

Volume Title

Publisher

Elsevier

Type

Article

Peer reviewed

Yes

Abstract

This study examines the effects of co-opted directors and further tests the monitoring effectiveness of non-co-opted independent directors and co-opted independent directors on capital structure decisions. Employing a large sample of 2,548 US firms over the 1996-2015 period, we find strong evidence that co-opted boards exert a positive and significant influence on firms’ financial leverage. We also find that, whereas co-opted independent directors are positively associated with financial leverage, non-co-opted independent directors have a negative influence on a firm’s leverage ratio, suggesting that co-option weakens the effective monitoring, thereby increasing the firm’s leverage ratio. Further analysis indicates that co-opted boards adjust towards target leverage levels at a faster speed, with a half-life within a year for book and market leverage. Lastly, our results show that the agency costs of managerial discretion and stockholder-bondholder conflicts arising from board co-option are important drivers of financial leverage relative to tax incentives. Our results are robust to alternative measures of board co-option, financial leverage, and endogeneity concerns.

Description

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.

Keywords

Co-opted boards, Leverage, Adjustment speed, Tax benefits, Financial crisis

Citation

Lartey, T., Danso, A. and Boateng, A. (2021) Co-opted boards and capital structure dynamics. International Review of Financial Analysis, 77, 101824.

Rights

Research Institute

Finance and Banking Research Group (FiBRe)