Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors

Posted: 2 Jan 2002

See all articles by Sanjeev Bhojraj

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management

Partha Sengupta

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

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Abstract

This paper provides evidence linking corporate governance mechanisms to higher bond ratings and lower bond yields. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. We find firms that have greater institutional ownership and stronger outside control of the board, enjoy lower bond yields and higher ratings on their new bond issues. However, concentrated institutional ownership has an adverse effect on yields and ratings. These results are robust to a specification that controls for institutional ownership being influenced by bond yields.

Keywords: Yield, rating, corporate governance, institutional ownership, board of directors

JEL Classification: G2

Suggested Citation

Bhojraj, Sanjeev and Sengupta, Partha, Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors. Journal of Business, Forthcoming. Available at SSRN: https://ssrn.com/abstract=295449

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Accounting
Ithaca, NY 14853
United States
607-255-4069 (Phone)
607-254-4590 (Fax)

Partha Sengupta (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Mail Stop 6E-3
Washington, DC 20219-0001
United States
202-679-5525 (Phone)

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