Board reforms and the choice of debt: international evidence

Abstract

PurposeThe authors examine how the major board reforms recently implemented by countries around the world affect firms' choice of debt.Design/methodology/approachUsing a quasi-experimental setting of major board reforms around the world that aim to improve board-related governance practices in various areas, this study investigates the impact of effective board monitoring on corporate debt choice. The authors employ difference-in-differences-type quasi-natural experiment method and path analysis for hypotheses testing.FindingsThe authors find that the implementation of board reforms is positively associated with firms' preference for public debt financing over bank debt. However, this effect tends to weaken after the fourth year following the implementation of board reforms. In additional analyses, the authors find that “rule-based” reforms have a more pronounced effect on firms' choice of debt than do “comply-or-explain” reforms. Both (1) strengthened firm-level internal governance practices that address concerns about the agency cost of debt and (2) reduced information asymmetries play important roles in facilitating firms' debt choice, but the evidence suggests that the former is the economic mechanism through which country-level reforms affect corporate debt choice.Research limitations/implicationsThe study extends the literature examining the heterogeneity of corporate debt choices in a global setting and the literature on the consequences of corporate governance reforms.Practical implicationsThe findings demonstrate the effectiveness of the corporate board reforms implemented in countries around the world, addressing concerns from critics about their potential harm or ineffectiveness.Originality/valueThe results indicate that country-level board reforms reduce the extent to which shareholder–creditor conflicts harm shareholders.