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FEK seminar series - Stefan Sundgren

Time Thursday 11 February, 2021 at 13:15 - 14:30
Place Zoom

Board members’ legal infractions and the agency cost of debt: Evidence from small business bankruptcies

We study how board members’ attitudes to risk, as measured by their personal legal infractions, are related to information asymmetry and agency problems prior to bankruptcy, using a sample of 260 small Swedish firms.
We find that auditor resignations are more likely in firms where at least one board member has a legal infraction. Furthermore, we find that legal infractions are negatively related to the likelihood of a firm disclosing its annual report and the quality of the bookkeeping, suggesting that information asymmetry problems are more severe when board members have legal infractions.
We also find that creditors’ recovery rates in bankruptcy are lower if board members have legal infractions, indicating that the agency costs of debt are higher.
A final finding is that auditor resignations seem to transmit the association between legal infractions and creditors’ recovery rates.

FEK seminar series

Event type: Seminar
Staff photo Stefan Sundgren
Stefan Sundgren
Read about Stefan Sundgren
Rickard Lindberg
Read about Rickard Lindberg