ARTICLE IN PRESS
Journal of Accounting and Economics 37 (2004) 315–342
Board characteristics, accounting report integrity,
and the cost of debt$
Ronald C. Andersona, Sattar A. Mansib, David M. Reebc,*
Kogod School of Business, American University, Washington, DC 20016, USA
Pamplin College of Business, Virginia Tech, Blacksburgh, VA 24061, USA
Fox School of Business, Temple University, 205 Speakman Hall, Philadelphia, PA 19122, USA
Received 21 February 2003; received in revised form 26 December 2003; accepted 16 January 2004
Creditor reliance on accounting-based debt covenants suggests that debtors are potentially
concerned with board of director characteristics that inﬂuence the integrity of ﬁnancial
accounting reports. In a sample of S&P 500 ﬁrms, we ﬁnd that the cost of debt is inversely
related to board independence and board size. We also ﬁnd that fully independent audit
committees are associated with a signiﬁcantly lower cost of debt ﬁnancing. Similarly, yield
spreads are also negatively related to audit committee size and meeting frequency. Overall,
these results provide market-based evidence that boards and audit committees are important
elements affecting the reliability of ﬁnancial reports.
r 2004 Elsevier B.V. All rights reserved.
JEL classification: M4; K0; G3
Keywords: Audit committee composition; Board composition; Corporate governance; Financial statements; Accounting information
We would like to thank Anup Agrawal, Mark DeFond (the referee), Augustine Duru, Scott Lee, Bob
Thompson, and seminar participants at American University, Temple University, Texas Tech, Virginia
Tech and S.P. Kothari (the editor) for their helpful suggestions. All remaining errors are the sole
responsibility of the authors.
*Corresponding author. Tel.: +1-215-204-6117; fax: +1-215-204-1697.
E-mail address: email@example.com (D.M. Reeb).
0165-4101/$ - see front matter r 2004 Elsevier B.V. All rights reserved....