Abstract

http://ssrn.com/abstract=960681
 
 

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Corporate Governance Reform and the Cost of Debt Financing of Listed French Companies


Charles Piot


University of Grenoble Alpes; French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)

Franck Missonier-Piera


University of Geneva - Graduate School of Business (HEC-Geneva); University of Geneva (HEC-Geneva)

September 1, 2009


Abstract:     
This study investigates the effects of governance characteristics on debt financing costs for listed French companies using corporate governance guidelines issued during the late nineties. Although the French system is strongly debt-oriented, creditor legal protection is weak and financial institutions have few direct internal monitoring channels (i.e., presence on the Board of Directors). We postulate, therefore, that they value the quality of corporate governance when determining loan conditions. Using a 1999-2001 sample of large, non-financial listed companies, we find an inverse relation between the ex post cost of debt and three corporate governance quality attributes: (1) Board independence, (2) the existence of a compensation committee composed of non-executive directors, and (3) the presence of significant institutional shareholders in the firm’s equity. However, the existence of an independent audit committee provides no significant benefits. These results are robust to firm size effects and to a large set of firm-specific characteristics. This study provides empirical support for the benefits of more effective monitoring of debtholders’ agency risk, but does not support accounting-auditing monitoring benefits regarding debtholders’ information risk. This might be explained by the very limited use of debt covenants in France at the time of the study. This study offers insights to financial institutions for benchmarking the quality of borrowers’ corporate governance, and in creating more optimal contract provisions in loan agreements. It also provides suggestions for corporate officers in the negotiation of interest rates with lenders.

Number of Pages in PDF File: 44

Keywords: Board Composition, Board Committees, Institutional Shareholder, Agency Theory, France

JEL Classification: M40, G32

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Date posted: February 6, 2007 ; Last revised: December 16, 2010

Suggested Citation

Piot, Charles and Missonier-Piera, Franck, Corporate Governance Reform and the Cost of Debt Financing of Listed French Companies (September 1, 2009). Available at SSRN: http://ssrn.com/abstract=960681 or http://dx.doi.org/10.2139/ssrn.960681

Contact Information

Charles Piot (Contact Author)
University of Grenoble Alpes ( email )
Grenoble Cedex 9, F-38040
France
French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)
150 rue de la Chimie, BP47
Grenoble Cedex 9, 38040
France
Franck Missonier-Piera
University of Geneva - Graduate School of Business (HEC-Geneva) ( email ) ( email )
40 bd Du Pont d'Arve
Geneva, 1211
Switzerland
University of Geneva (HEC-Geneva) ( email ) ( email )
40 bd Du Pont d'Arve
Geneva, 1211
Switzerland
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References:  27
Citations:  5

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