Job Market Paper
Title: Ties That Bind, Costs That Fall? CEO-Board Connections and the Cost of Debt
Abstract: This study examines how CEO–board connections influence firms’ cost of debt, drawing on competing governance perspectives regarding the role of board friendliness. The role conflict view suggests that close social ties between CEOs and directors weaken monitoring, reduce corporate risk-taking, and lower borrowing costs, while the role alignment view argues that such ties enhance monitoring through trust and information flow, increasing risk-taking and raising debt costs. To evaluate these perspectives, I combine a stacked difference-in-differences design with instrumental variable analyses exploiting exogenous, CEO turnover-driven shocks to CEO–board connections, and a Heckman two-step procedure to address potential sample selection bias. Results show that CEO–board connections are negatively associated with firms’ bond spreads, consistent with the role conflict view. Mediation analyses further reveal that this relationship operates through reduced corporate risk-taking, measured by the volatility of returns and leverage. Moreover, the negative effect of CEO–board connections on debt costs is amplified in nuanced information environments (specifically, when analyst coverage is high, forecast error is high, or both conditions jointly hold). Together, these findings demonstrate that interpersonal dynamics within the boardroom have material implications for debt pricing. The study contributes to the literature by clarifying the conditions under which friendly boards lower financing costs, and it adds to practice by identifying a novel governance channel that creditors can incorporate into credit risk assessments.
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