Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards

46 Pages Posted: 20 May 2012

See all articles by Pornsit Jiraporn

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Pandej Chintrakarn

Mahidol University International College (MUIC)

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business

Yixin Liu

University of New Hampshire

Date Written: May 18, 2012

Abstract

Corporate governance is usually viewed in the context of strengthening shareholder rights and enhancing shareholders’ welfare. However, the impact of corporate governance on bondholders is much less understood. We explore how corporate governance influences the cost of debt financing. Using broad governance metrics encompassing fifty governance attributes reported by The Institutional Shareholder Services (ISS), we document that stronger corporate governance is associated with a higher cost of debt. As governance strengthens by one standard deviation, the cost of debt rises by as much as 11%. The results are robust even after controlling for both firm-specific and issue-specific characteristics. Our results are important because they suggest that corporate governance has a palpable effect on critical corporate outcomes such as credit ratings and bond yields. More importantly, we show that, while corporate governance may mitigate the agency conflict between managers and shareholders, it appears to exacerbate the agency conflict between shareholders and bondholders (the agency cost of debt).

Keywords: cost of debt, agency theory, bondholders, bond yields, corporate governance, Institutional Shareholder Services

JEL Classification: G32, G34, G38

Suggested Citation

Jiraporn, Pornsit and Chintrakarn, Pandej and Kim, Jang-Chul and Liu, Yixin, Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards (May 18, 2012). Available at SSRN: https://ssrn.com/abstract=2062104 or http://dx.doi.org/10.2139/ssrn.2062104

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Pandej Chintrakarn

Mahidol University International College (MUIC) ( email )

999 Buddhamonthon 4 Road
Salaya, Nakhonpathom, 73170
Thailand
66 (0) 2441 5090 (Phone)
66 (0) 2441 9745 (Fax)

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Accounting, Finance, and Business Law
Highland Heights, KY 41099
United States
859-572-1486 (Phone)

Yixin Liu

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

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