Abstract
We find that the number of independent directors on corporate boards increases by approximately 24% following financial covenant violations in credit agreements. Most of these new directors arelinked to creditors. Firms with stronger lending relationships with their creditors appoint more new directors in response to covenant violations than firms without such relationships. Moreover, firms that appoint new directors after violations are more likely to issue new equity and decrease CEO cash compensation than firms without such appointments. We conclude that a firm's board composition, governance, and policies are shaped by current and past credit agreements.
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