Credit Risk and Governance: Evidence from Credit Default Swap Spreads

Abstract

In this paper, we examine the effect of shareholder governance mechanisms on the firms' credit risk through credit default swap spreads. Our results suggest that higher antitakeover provisions decrease the price of debt. We find that on average, addition of one antitakeover provision lowers the CDS spread by 3.46 basis points. In addition, we find that this effect is more pronounced for smaller, highly levered, low-rated, and less profitable firms. Since these firms arguably carry a higher financial distress risk, it appears that bondholders favor weaker shareholder governance when the conflict of interest between the shareholders and the bondholders peak.

Keywords: Corporate Governance, Credit Risk, Credit Default Swap Spreads, Cost of Debt, G-Index.

JEL Classification: G30, G32, G34