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,*
a
Kogod School of Business, American University, Washington, DC 20016, USA
b
Pamplin College of Business, Virginia Tech, Blacksburgh, VA 24061, USA
c
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
Abstract
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: dreeb@temple.edu (D.M. Reeb).
0165-4101/$ - see front matter r 2004 Elsevier B.V. All rights reserved....