The Effects of Corporate Governance Attributes on Credit Ratings and Bond Yields
Duke University - Fuqua School of Business
George S. Dallas
F&C Investments; European Corporate Governance Institute (ECGI)
University of Notre Dame; Loyola University of Chicago
University of Baltimore
September 25, 2008
This study examines the empirical relations between the governance structure of public corporations in the United States and the credit ratings and pricing of their debt securities. We study an unbalanced panel of 775 unique firms from 2001 through 2007. Consistent with the existing literature, we find that the primary determinant of a firm's credit rating is its financial condition. However, governance attributes relating to transparency, ownership structure, shareholder rights, board structure and executive compensation are significantly related to credit ratings as well, even after accounting for the financial condition of the firm. We also find that the presence of anti-takeover measures is associated with higher credit scores for firms with investment grade debt and lower for firms with speculative grade debt. Finally, our empirical results suggest that stable boards, defined as boards having attributes relating to tenure, liability indemnification and classified board structures, have higher credit ratings and lower bond spreads. We conjecture that boards with greater stability may be better positioned to take into consideration the longer term interests of the firm as a whole, thereby benefiting the firm's bondholders.
Keywords: corporate governance, credit risk, credit rating, bond spreads
JEL Classification: G30working papers series
Date posted: January 14, 2009 ; Last revised: May 15, 2010
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