Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards

Pornsit Jiraporn, Pandej Chintrakarn, Jang Chul Kim, Yixin Liu

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

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).

Original languageEnglish (US)
Pages (from-to)205-227
Number of pages23
JournalJournal of Financial Services Research
Volume44
Issue number2
DOIs
StatePublished - Oct 1 2013

Fingerprint

Corporate governance
Institutional shareholders
Governance
Agency costs of debt
Shareholders
Cost of debt
Agency conflict
Bondholders
Debt financing
Standard deviation
Shareholder rights
Managers
Credit rating
Bond yields
Encompassing

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Jiraporn, Pornsit ; Chintrakarn, Pandej ; Kim, Jang Chul ; Liu, Yixin. / Exploring the Agency Cost of Debt : Evidence from the ISS Governance Standards. In: Journal of Financial Services Research. 2013 ; Vol. 44, No. 2. pp. 205-227.
@article{9064aa9c979a4980bd1af50679ef3a1f,
title = "Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards",
abstract = "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).",
author = "Pornsit Jiraporn and Pandej Chintrakarn and Kim, {Jang Chul} and Yixin Liu",
year = "2013",
month = "10",
day = "1",
doi = "10.1007/s10693-012-0142-2",
language = "English (US)",
volume = "44",
pages = "205--227",
journal = "Journal of Financial Services Research",
issn = "0920-8550",
publisher = "Springer Netherlands",
number = "2",

}

Exploring the Agency Cost of Debt : Evidence from the ISS Governance Standards. / Jiraporn, Pornsit; Chintrakarn, Pandej; Kim, Jang Chul; Liu, Yixin.

In: Journal of Financial Services Research, Vol. 44, No. 2, 01.10.2013, p. 205-227.

Research output: Contribution to journalArticle

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 - 2013/10/1

Y1 - 2013/10/1

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).

UR - http://www.scopus.com/inward/record.url?scp=84884534617&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84884534617&partnerID=8YFLogxK

U2 - 10.1007/s10693-012-0142-2

DO - 10.1007/s10693-012-0142-2

M3 - Article

AN - SCOPUS:84884534617

VL - 44

SP - 205

EP - 227

JO - Journal of Financial Services Research

JF - Journal of Financial Services Research

SN - 0920-8550

IS - 2

ER -