The Effect of Corporate Governance on Firm’s Credit Ratings: Further Evidence Using Governance Score in the United States

Abstract

We investigate whether corporate governance affects firms’ credit ratings and whether improvement in corporate governance standards is associated with improvement in investment grade rating. We use the Gov‐score of Brown and Caylor (2006), the Gomper’s G index and an entrenchment score of Bebchuk et al. (2009) to proxy for corporate governance. Using a sample of US firms, we find that firms characterized by stronger corporate governance have a significantly higher credit rating, and that this association is accentuated for smaller firms relative to larger firms. We find that an improvement in corporate governance is associated with improvement in bond rating.

Keywords: Corporate governance, Credit ratings, Changes in corporate governance, Changes in credit ratings