Does Internal Board Monitoring Affect Debt Maturity?

Abstract

The managerial agency issue between manager and investors can be controlled by debtholders via short term debt as it provides an external control on managers via frequent renegotiation of the debt contract. Alternatively, increased board independence can mitigate the managerial agency problem by establishing a stronger and effective internal monitoring mechanism of managers. So, strong corporate governance can substitute the maturity structure of debt, or vice versa, in terms of managerial control. In this paper, we investigate the effect of internal board monitoring on firms’ debt maturity structure. We exogenously identify internal monitoring via board independence and estimate its real impact on maturity using Sarbanes – Oxley Act of 2002 and the Securities and Exchange Commission regulations as exogenous shocks to board structure in a natural experiment setting. Supporting the managerial agency theory, our findings indicate that firms have debt with longer maturity as board independence increases and internal monitoring becomes stronger. Our original results stay unchanged after implementing placebo tests and controlling for the CEO ownership, bond ratings and CEO duality. We also provide more insight into this relation by considering different aspects of debt issuance, organizational structure and as well as the times with financial crises. Our findings stay robust focusing only on the new debt issuance while the results are even stronger for conglomerate firms. We find the relation between internal monitoring and debt maturity becomes less clear during times of financial instability.

Keywords: Governance, Board Duality, Debt Maturity, Agency Issue, Natural Experiment

JEL Classification: G32, G38, C33