Independence of the Board of Directors Reduces the Debt Financing Cost?

Abstract

Objective: Check the influence of board of directors independence on the cost of debt financing of companies listed in B3. Method: The cost of the debt was analyzed by calculating the ratio between the financial expenses and costly liability. For board independence, three variables were used: 1) percentage of independent members; 2) dummy who received 1 value when most board members were independent; and, 3) dummy that captured the existence of duality in the position of CEO and chairman of the board. Originality/relevance: In the literature, the results of previous studies are still divergent. Thus, this issue still presents shortcomings which require investigation. Furthermore, the investigations occurred, mainly, in North American companies, so the matter deserves attention in countries such as the Brazil. Results: The average cost of debt increased from 2012 to 2016. The average percentage of independent members did not exceed 25%, in less than 17% of the companies, independent members were the majority, and there was a reduction in the number of companies with duality in CEO and chairman positions. It was also found that only the percentage of independent members influenced to reduce the cost of debt. It is believed that the pressure exerted by the controlling shareholder and other internal directors may be reducing the positive impact of the independent directors. Theoretical/methodological contributions: The research contributes to strengthen the understanding of the theme in Brazilian scenario and broadens the existing discussion in the literature by addressing a factor influencing the cost of debt financing still little explored in Brazil.

Efeito da estrutura do conselho de administração na retenção de caixa das companhias abertas

“…And with companies with weaker corporate governance structures, it is possible that shareholders will set cash volume limits available to managers in order to avoid wasting resources and force managers to be eficient (Harford, Mansi & Maxwell, 2008). Therefore, best practices of corporate governance should be adopted to restrict the undesirable actions of managers (Moura et al, 2020) and thus ensure that cash reserves become used for the company's sake. Chen (2008) examined the impact of the corporate governance structure on the cash holding of 1,500 U.S. companies between 2000 and 2004.…”

“…The board of directors is one of the main internal corporate governance mechanisms and serves as supervisor of business activities, besides being responsible for helping investors to make decisions and minimize the irregular actions of managers, through the alignment of interests between investors, creditors and managers (Coles, Daniel & Naveen, 2008;Chancharat, Krishnamurti & Tian, 2012;Nisiyama & Nakamura, 2018;Einsweiller, Moura & Kruger, 2020;Moura et al, 2020).…”

“…As the actions of the agents can not be fully observed by shareholders and creditors and as managers, in general, have privileged and detailed information about the company, corporate governance mechanisms must be adopted to mitigate these agency problems. Coles, Daniel and Naveen (2008), Nisiyama and Nakamura (2018) and Moura, Bonetti, Mazzioni, Teixeira and Magro (2020) report that the board of directors is an important internal mechanism of corporate governance, since its primary function is to monitor the actions of the executive board, which reduces possible managerial failures (Chancharat, Krishnamurti & Tian, 2012). According to Jensen (1986) and Ferreira and Vilela (2004), as the cash holding increases the volume of assets held by management and, consequently, its discretion over investment decisions, the accumulation of cash may have the purpose of expropriating shareholder wealth by managers and, therefore, the structure of board of directors can impact the amount of cash held in companies.…”

“…The board of directors represents the central mechanism of corporate governance (Moura & Beuren, 2011;Moura et al, 2020) and deals with the defense of the interests of shareholders through practices that encourage managers to internalize the well-being of capital holders, that is, the purpose of this board is to align the different interests in an organization and, thus, enhance the market value of the company. Therefore, the structure of the board has a material impact on the decision to spend or hold cash, because it is the controllers and managers who manage the company's assets (Al-Najjar & Clark, 2017).…”

“…Another reason is the need to verify this effect in Brazilian companies. Brazil is an emerging country and, therefore, tends to present a different behavior in relation to other countries considered as more developed (Al-Najjar & Clark, 2017;Ermel & Medeiros, 2020;Moura et al, 2020). In general, according to La Porta, Lopez-de-Silanes, Shleifer and Vishny 2000 Brazilian companies are characterized by low legal protection to minority shareholders and high shareholding concentration, factors that highlight the importance of a wellstructured board of directors, that is, independent, without CEO duality and of relatively adequate size.…”