Corporate Governance and the Cost of Borrowing

31 Pages Posted: 15 Nov 2013

See all articles by Pascal Frantz

Pascal Frantz

London School of Economics

Norvald Instefjord

University of Essex - Essex Business School

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Date Written: September/October 2013

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. Finally, we find that the strength of the governance mechanism can influence the incentives to carry out risk shifting.

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

Suggested Citation

Frantz, Pascal and Instefjord, Norvald, Corporate Governance and the Cost of Borrowing (September/October 2013). Journal of Business Finance & Accounting, Vol. 40, Issue 7-8, pp. 918-948, 2013, Available at SSRN: https://ssrn.com/abstract=2354735 or http://dx.doi.org/10.1111/jbfa.12034

Pascal Frantz (Contact Author)

London School of Economics ( email )

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Norvald Instefjord

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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