Corporate Governance, Credit Condition, and the Cost of Debt

Abstract:     
Based on the conflicting incentives among bondholders, shareholders, and managers, we develop two hypotheses relating corporate governance to the cost of debt, depending on a firm’s credit condition. The closer a firm is to default, governance mechanisms that align the incentives of managers with shareholders and the presence of antitakeover devices are increasingly associated with a higher cost of debt. Our empirical analyses using a comprehensive set of governance variables and empirically-validated antitakeover provisions provide broad support for these hypotheses.

Number of Pages in PDF File: 59

Keywords: corporate governance, credit condition, cost of debt, antitakeover laws, antitakeover provisions

JEL Classification: G34, K22

working papers series