The Effects of Corporate Governance on Firms' Credit Ratings

55 Pages Posted: 3 Mar 2004

See all articles by Hollis Ashbaugh Skaife

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis

Daniel W. Collins

University of Iowa - Department of Accounting

Ryan LaFond

Algert Global, LLC

Date Written: June 2004

Abstract

Using a framework for evaluating corporate governance recently developed by Standard & Poor's, this study investigates whether firms that exhibit strong governance benefit from higher credit ratings relative to firms with weaker governance. We document, after controlling for risk characteristics, that firm credit ratings are: (1) negatively associated with the number of blockholders that own at least a 5% ownership in the firm; (2) positively related to weaker shareholder rights in terms of takeover defenses; (3) positively related to the degree of financial transparency; and (4) positively related to over-all board independence, board stock ownership and board expertise, and negatively related to CEO power on the board. We also provide evidence that CEOs of firms with speculative grade credit ratings are overcompensated to a greater degree than their counterparts at firms with investment grade ratings, and that the overcompensation exceeds the CEO's share of additional debt costs related to lower credit ratings. Our study provides insights into the characteristics of governance that are likely to affect the cost of debt financing and provides one explanation for why some firms continue to operate with weaker governance when doing so may mean lower credit ratings.

Keywords: Corporate governance, Credit rating, Executive compensation

JEL Classification: G30, G32, M41

Suggested Citation

Skaife, Hollis Ashbaugh and Collins, Daniel W. and LaFond, Ryan, The Effects of Corporate Governance on Firms' Credit Ratings (June 2004). Available at SSRN: https://ssrn.com/abstract=511902 or http://dx.doi.org/10.2139/ssrn.511902

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis ( email )

Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States

Daniel W. Collins (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Ryan LaFond

Algert Global, LLC ( email )

One Maritime Plaza
Suite 1525
San Francisco, CA 94111
United States

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