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Beyond the balance sheet: Assessing corporate governance through the Lens of debtholders

Author

Listed:
  • Bakr Al-Gamrh

    (ESC [Rennes] - ESC Rennes School of Business)

  • Umar Farooq
  • Tanveer Ahsan

    (RTO - Rethinking Tomorrow’s Organisation - Rennes School of Business - ESC [Rennes] - ESC Rennes School of Business)

Abstract

This study investigates the relationships between economic uncertainty (EU), corporate governance (CG), and the cost of debt (COD). Using an index-based measure of CG, this study investigates how CG influences debtholders' perspectives during periods of EU. The study utilizes a dataset of nonfinancial firms listed in European countries from 2013 to 2021. We find that EU and COD are positively associated, indicating that EU increases the COD of European firms. Second, while CG has an insignificant direct impact on COD, it has a significant negative moderating impact on the relationship between EU and COD, suggesting that although a strong CG system may not have a significant direct impact on COD, it has the potential to reduce the uncertainty-induced COD of European firms. The results remain consistent with alternative proxies of COD and CG, as well as before and after the COVID-19 period. The results for CG subindices suggest that shareholder rights and compensation serve as reliable indicators for debtholders during periods of EU, while audit quality and board structure do not play any significant role in reducing uncertainty-induced COD. Our findings emphasize the key role that effective CG plays in mitigating EU's adverse effects on COD. Our results are robust to endogeneity issues such as reverse causality and selection bias, as well as to external factors like time and industry effects.

Suggested Citation

  • Bakr Al-Gamrh & Umar Farooq & Tanveer Ahsan, 2024. "Beyond the balance sheet: Assessing corporate governance through the Lens of debtholders," Post-Print hal-04727168, HAL.
    • Handle: RePEc:hal:journl:hal-04727168
    DOI: 10.1016/j.irfa.2024.103625
    Note: View the original document on HAL open archive server: https://hal.science/hal-04727168v1
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    References listed on IDEAS

    as
    1. Hites Ahir & Nicholas Bloom & Davide Furceri, 2022. "The world uncertainty index," CEP Discussion Papers dp1842, Centre for Economic Performance, LSE.
    2. Ali, Searat & Liu, Benjamin & Su, Jen Je, 2018. "Does corporate governance quality affect default risk? The role of growth opportunities and stock liquidity," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 422-448.
    3. Tanveer Ahsan & Muhammad Azeem Qureshi, 2017. "The impact of financial liberalization on capital structure adjustment in Pakistan: a doubly censored modelling," Applied Economics, Taylor & Francis Journals, vol. 49(41), pages 4148-4160, September.
    4. Nisar Ahmad & Asma Mobarek & Moodhi Raid, 2023. "Impact of global financial crisis on firm performance in UK: Moderating role of ESG, corporate governance and firm size," Cogent Business & Management, Taylor & Francis Journals, vol. 10(1), pages 2167548-216, December.
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    Cited by:

    1. Honey, Damian & Ahsan, Tanveer & Migliori, Stefania, 2025. "The impact of governance quality on corporate climate risk disclosure: The role of the governance committee," International Review of Financial Analysis, Elsevier, vol. 98(C).

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    Keywords

    Economy; Europe; Debt; Corporate Governance; Economic uncertainty Corporate governance Cost of debt Europe;
    All these keywords.

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