Premium
Corporate Governance and the Cost of Borrowing
Author(s) -
Frantz Pascal,
Instefjord Norvald
Publication year - 2013
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12034
Subject(s) - corporate governance , restructuring , incentive , shareholder , business , debt , empirical evidence , mechanism (biology) , economics , agency cost , carry (investment) , monetary economics , finance , microeconomics , philosophy , epistemology
This paper analyzes the theoretical link between governance (defined loosely as the degree of protection offered to outside shareholders), and the cost of borrowing. We find, consistent with empirical evidence, that improvements in governance reduce the likelihood of default. Also, we find that improvements in governance will monotonically increase or reduce the cost of debt, where the sign of the relationship depends on the firm's restructuring cost in default. Finally, we find that the strength of the governance mechanism can influence the incentives to carry out risk shifting.