TY - JOUR
T1 - Exploring the Agency Cost of Debt
T2 - Evidence from the ISS Governance Standards
AU - Jiraporn, Pornsit
AU - Chintrakarn, Pandej
AU - Kim, Jang Chul
AU - Liu, Yixin
PY - 2013/10
Y1 - 2013/10
N2 - Corporate governance is usually viewed in the context of strengthening shareholder rights and enhancing shareholders' welfare. However, the impact of corporate governance on bondholders is much less understood. We explore how corporate governance influences the cost of debt financing. Using broad governance metrics encompassing fifty governance attributes reported by The Institutional Shareholder Services (ISS), we document that stronger corporate governance is associated with a higher cost of debt. As governance strengthens by one standard deviation, the cost of debt rises by as much as 11 %. The results are robust even after controlling for both firm-specific and issue-specific characteristics. Our results are important because they suggest that corporate governance has a palpable effect on critical corporate outcomes such as credit ratings and bond yields. More importantly, we show that, while corporate governance may mitigate the agency conflict between managers and shareholders, it appears to exacerbate the agency conflict between shareholders and bondholders (the agency cost of debt).
AB - Corporate governance is usually viewed in the context of strengthening shareholder rights and enhancing shareholders' welfare. However, the impact of corporate governance on bondholders is much less understood. We explore how corporate governance influences the cost of debt financing. Using broad governance metrics encompassing fifty governance attributes reported by The Institutional Shareholder Services (ISS), we document that stronger corporate governance is associated with a higher cost of debt. As governance strengthens by one standard deviation, the cost of debt rises by as much as 11 %. The results are robust even after controlling for both firm-specific and issue-specific characteristics. Our results are important because they suggest that corporate governance has a palpable effect on critical corporate outcomes such as credit ratings and bond yields. More importantly, we show that, while corporate governance may mitigate the agency conflict between managers and shareholders, it appears to exacerbate the agency conflict between shareholders and bondholders (the agency cost of debt).
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U2 - 10.1007/s10693-012-0142-2
DO - 10.1007/s10693-012-0142-2
M3 - Article
AN - SCOPUS:84884534617
SN - 0920-8550
VL - 44
SP - 205
EP - 227
JO - Journal of Financial Services Research
JF - Journal of Financial Services Research
IS - 2
ER -