Corporate Governance and the Cost of Debt of Large European Firms

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: corporate governance, disclosure, cost of debt, shareholder rights, agency costs, information risk, interaction effect

JEL Classification: M, G3, O16