The double‐edged sword of going “overboard”: Board connectedness, debt quality, and the cost of debt

Abstract

Board connectedness, a result of directors serving the boards of more than one firm, impacts companies positively (access to resources provided by connected directors) and negatively (directors being “spread too thin”). Given that debt quality has a high influence on the cost of debt, this paper examines how the cost of debt (bond yield spread) is influenced by a firm's board connectedness while considering the effect that debt quality (bond ratings) may have on such a relationship. Results show that the relationship between connectedness and the cost of debt is highly dependent on debt quality, where connectedness is associated with a lower cost of debt if debt quality is high; however, connectedness is also associated with a higher cost of debt if debt quality is low. We also note that as the debt quality for connected firms decreases as their cost of debt increases. We are contributing to administrative sciences by studying one of its key elements: governance, more specifically the connectivity of boards of directors. This contributes to the current debate on the effect of board connectivity: prior research has not provided conclusive results, and we show that the effect is different based on the characteristics of the firm's debt.