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Corporate governance and the cost of borrowing

Frantz, Pascal and Instefjord, Norvald (2012) Corporate governance and the cost of borrowing. Social Science Research Network.

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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. This finding can also rationalize existing empirical evidence within an optimal contracting argument for the use of debt.

Item Type: Monograph (Working Paper)
Official URL: http://papers.ssrn.com/
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce > HF5601 Accounting
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
Sets: Departments > Accounting
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 10 Aug 2012 10:42
URL: http://eprints.lse.ac.uk/45327/

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