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Using the passage of the Sarbanes-Oxley Act and the associated changes in listing standards as a natural experiment, we find that while board independence decreases the cost of debt when credit conditions are strong or leverage is low, it increases the cost of debt when credit conditions are poor or leverage is high. We also document that independent directors set corporate policies that increase firm risk. These results suggest that independent directors act in the interests of shareholders and are increasingly costly to bondholders with the intensification of the agency conflict between these two stakeholder groups.
