Board Monitoring, director connections, and credit quality

This dissertation investigates the causes and consequences of effective monitoring by corporate boards of directors. I demonstrate that distortions to a board's ability and disposition to monitor management, represented by Board Co-option, affect the firm's credit quality. Firms with higher levels of Board Co-option receive lower credit ratings and larger credit spreads, especially when they are highly levered. I identify these effects through ordinary least squares estimations with fixed effects and through instrumental variables estimations, using director deaths as exogenous shocks to Board Co-option. I disentangle the effects of co-option from those of director-CEO connections and find that pre-appointment connections do not drive the adverse effects on credit quality. Instead, reductions in monitoring effectiveness appear to come from management capturing directors and earning their allegiance through the director's appointment to the board.