Governance and leverage: International evidence

In this study, we use board reforms across countries as a natural experiment to examine the effect of governance on firm leverage. We find that board reforms are associated with a statistically significant 1-percentage-point increase in leverage overall and a 5-percentage-point increase on average for firms that had to make large board changes. These results are robust to a variety of specifications and to controls for potential confounding events. The increase in leverage is also larger for firms in weak shareholder rights countries, suggesting that other shareholder rights can substitute in part for board reforms.