Boards and Bonds in Bad Times

We study how the heterogeneity between the CEO and independent board directors as a group stemming from cultural diversity affects debt pricing in bad times. Using a novel approach to identify directors’ cultural backgrounds based on their ancestral origins, we find that greater CEO–independent director cultural distance attenuates the adverse effect of economic policy uncertainty on yield spreads. Importantly, these positive outcomes exist beyond the presence of other external monitors―Big 4 auditors, financial analysts, and long-term institutional investors―CEO age, gender, financial expertise, and social ties distance, and when the independent directors are non-coopted. We also find that cultural distance between the audit committee and the CEO is associated with lower yield spreads in bad times. The results suggest that changes in bondholders’ assessment of firm performance during periods of high policy uncertainty is a function of differences in cultural backgrounds between the CEO and independent directors