The Effects of Financial Distress and Capital Structure on the Work Effort of Outside Directors

Abstract

This paper investigates the conflict of interests between shareholders and debtholders by examining the work effort of outside directors when a company experiences financial distress or has a high financial leverage. We find that at both company level and individual director level: (i) outside directors of a firm with higher financial distress work less hard controlling for financial leverage; (ii) outside directors of a firm with a higher financial leverage work harder controlling for financial distress.

Keywords: Work effort, Outside director, Financial distress, Financial Leverage, Board meeting

JEL Classification: G30