Board Quality and the Cost of Debt Capital : The Case of Bank Loans

We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms with higher quality boards and even a single (non-insider) advisory board member borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection as well as the size and financial characteristics of the borrower. We also show that board quality and other governance characteristics influence the likelihood that loans will have covenant requirements, but the relations differ by covenant type. Firms with high quality boards are less likely to have loans with financial ratio restrictions or collateral requirements, though these covenants are more likely when CEO cash compensation is high or when the percentage of incentive-based pay is low. Overall, the quality of the board plays an important role in lowering the cost of debt.