Corporate Governance and the Cost of Debt of Large European Firms

49 Pages Posted: 7 Jun 2010

See all articles by Marc Schauten

Marc Schauten

Vrije Universiteit Amsterdam

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: June 2, 2010

Abstract

This paper examines the effects of different corporate governance mechanisms on the cost of debt for large European firms and documents a novel interaction effect between shareholder rights and disclosure. Improved disclosure leads to a lower credit spread only if shareholder rights are low. A possible explanation for this finding is the ‘share rights or disclose’ hypothesis. If shareholders have sufficient rights to monitor and influence management decisions, debt providers can rely upon shareholders to mitigate agency costs. Otherwise, bondholders require a premium to compensate for the information risk due to uncertainty about the true value of the firm.

Keywords: corporate governance, disclosure, cost of debt, shareholder rights, agency costs, information risk, interaction effect

JEL Classification: M, G3, O16

Suggested Citation

Schauten, Marc and van Dijk, Dick J.C., Corporate Governance and the Cost of Debt of Large European Firms (June 2, 2010). ERIM Report Series Reference No. ERS-2010-025-F&A, Available at SSRN: https://ssrn.com/abstract=1620719

Marc Schauten (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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