4.7 Article

Co-opted boards and capital structure dynamics

Journal

Publisher

ELSEVIER SCIENCE INC
DOI: 10.1016/j.irfa.2021.101824

Keywords

Co-opted boards; Leverage; Adjustment speed; Tax benefits; Financial crists

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The study found that co-opted boards have a significant and positive influence on financial leverage, while non-co-opted independent directors have a negative impact on monitoring. Co-opted boards adjust towards target leverage levels faster, leading to an increase in the firm's leverage ratio.
This study examines the effects of co-opted directors and further tests the monitoring effectiveness of non-coopted independent directors and co-opted independent directors on capital structure decisions. Employing a large sample of 2548 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.

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