The Effects of Corporate Governance on Firms' Credit Ratings

Board Effectiveness and Cost of Debt

“…Some studies have specifically addressed the effect of the board of directors on the cost of debt financing (Anderson et al, 2004;Ashbaugh-Skaife et al, 2006;Bhojraj and Sengupta, 2003;Ertugrul and Hegde, 2008;Piot and Missonier-Piera, 2007). Their results are consistent with the argument that debtholders favour monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness as a source of greater assurance with respect to the integrity of accounting numbers, so improving the financial accounting process.…”

“…Like Klein (1998) and Ashbaugh-Skaife et al (2006), we measure board competency or expertise by the percentage of board members that sit on boards of other companies, supporting the view that directorships serve as a measure of a director's reputation as a monitor (Fama, 1980;Fama and Jensen, 1983). However, some studies suggest that too many directorships may lower the effectiveness of directors as corporate monitors (Fich and Shivdasani, 2006;Shivdasani and Yermack, 1999) and Ferris et al (2003) claim that busy boards are as effective as non-busy boards at monitoring.…”

“…Likewise Bhojraj and Sengupta's (2003) results showed that bond yields on new debt issues are negatively associated with the fraction of the board made up by outsiders. Ashbaugh-Skaife et al (2006) observe that firm credit ratings are positively related to overall board independence, resulting in significant debt cost savings for firms. We therefore formulate the following hypothesis in its alternative form:…”

“…If director equity ownership creates incentives for directors to monitor firm management more closely and mitigate firm risk, it is expected that debtholders may benefit from this. Ashbaugh-Skaife et al (2006) analyse the effect of the percentage of shares held by officers or directors on firm credit ratings and find a positive relationship whereas Ertugrul and Hegde (2008) find that equity-based compensation increases the monitoring incentives of outside directors and is negatively associated with bond yield spreads.…”

Governance and the Common Good

“…Ahmed and Duellman (2007) find that firms' accounting is more conservative given greater board independence. Ashbaugh-Skaife et al (2006) find a positive relation between board independence and firms' credit ratings. Finally, Charitou et al (2007) find that firms are less likely to be delisted from the NYSE given greater board independence.…”