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

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  • Pornsit Jiraporn
  • Pandej Chintrakarn
  • Jang-Chul Kim
  • Yixin Liu

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). Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Pornsit Jiraporn & Pandej Chintrakarn & Jang-Chul Kim & Yixin Liu, 2013. "Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(2), pages 205-227, October.
    • Handle: RePEc:kap:jfsres:v:44:y:2013:i:2:p:205-227
    DOI: 10.1007/s10693-012-0142-2
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    Cited by:

    1. Chintrakarn, Pandej & Jiraporn, Pornsit & Kim, J.C., 2013. "The effect of corporate governance on CEO luck: Evidence from the Institutional Shareholder Services (ISS)," Finance Research Letters, Elsevier, vol. 10(4), pages 169-174.
    2. Oscar Briones & Melisa Chang, 2017. "Capital Structure Determinants Influence: A Comparative Study," Proceedings of International Academic Conferences 5007097, International Institute of Social and Economic Sciences.
    3. Jory, Surendranath & Ngo, Thanh & Susnjara, Jurica, 2017. "The effect of shareholder activism on bondholders and stockholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 328-344.
    4. Dong Chen, 2014. "The Non-monotonic Effect of Board Independence on Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(2), pages 145-171, April.
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    6. Julien Lachuer & Sami Ben Jabeur, 2022. "Explainable artificial intelligence modeling for corporate social responsibility and financial performance," Journal of Asset Management, Palgrave Macmillan, vol. 23(7), pages 619-630, December.

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    More about this item

    Keywords

    Cost of debt; Agency theory; Bondholders; Bond yields; Corporate governance; Institutional shareholder services; G32; G34; G38;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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