Corporate Governance and the Cost of Borrowing

41 Pages Posted: 6 Mar 2012

See all articles by Pascal Frantz

Pascal Frantz

London School of Economics

Norvald Instefjord

University of Essex - Essex Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2012

Abstract

This paper analyzes the theoretical link between governance (defined loosely as the degree of protection offered to outside shareholders), and the cost of borrowing. We find, consistent with empirical evidence, that improvements in governance reduce the likelihood of default. Also, we find that improvements in governance will monotonically increase or reduce the cost of debt, where the sign of the relationship depends on the firm's restructuring cost in default. This finding can also rationalize existing empirical evidence within an optimal contracting argument for the use of debt.

Keywords: benefit diversions, corporate governance, cost of borrowing, default

JEL Classification: G32, G34, G38

Suggested Citation

Frantz, Pascal and Instefjord, Norvald, Corporate Governance and the Cost of Borrowing (March 5, 2012). Available at SSRN: https://ssrn.com/abstract=2016280 or http://dx.doi.org/10.2139/ssrn.2016280

Pascal Frantz

London School of Economics ( email )

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Norvald Instefjord (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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