Corporate Governance and the Cost of Debt of Large European Firms

Marc Schauten and Dick van Dijk

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: This paper examines the effects of different corporate governance mechanisms on the cost of debt for large European firms and documents a novel interaction effect between shareholder rights and disclosure. Improved disclosure leads to a lower credit spread only if shareholder rights are low. A possible explanation for this finding is the ‘share rights or disclose’ hypothesis. If shareholders have sufficient rights to monitor and influence management decisions, debt providers can rely upon shareholders to mitigate agency costs. Otherwise, bondholders require a premium to compensate for the information risk due to uncertainty about the true value of the firm.

Keywords: agency costs; corporate governance; cost of debt; disclosure; information risk; interaction effect; shareholder rights (search for similar items in EconPapers)
JEL-codes: G3 M O16 (search for similar items in EconPapers)
Date: 2010-06-02
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:19679

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