Does great governance subject to debtholders? Evidence through the credit ratings of Japanese businesses

Research in International Organization and Finance 29 (2013) 14–34

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j u ur bist du l l om ep ag at the: w watts w. at the l t e sixth is v i elizabeth r. c o meters / d o c a to e / r we b a f

Truly does good governance matter to debtholders?

Proof from the credit ratings of

Japanese п¬Ѓrms

Hiroyuki Aman a, 1, Pascal Nguyen w, в€—


School of Business Government, Kwansei Gakuin University, Uegahara, Nishinomiya, Hyogo 662-8501, The japanese


Faculty of Organization, University of Technology Sydney, P. To. Box 123, NSW 2007, Sydney, Sydney

a l t i c m e

we n farreneheit o

Document history:

Received 15 Mar 2012

Received in modified form four October 2012

Accepted eleven February 2013

Available online xxx


Credit rating

Cost of debts


Corporate governance



a b s i9000 t ur a c t

In line with existing proof based on ALL OF US firms, all of us show great governance is usually associated with higher credit ratings. The most significant parameters are institutional ownership and disclosure top quality. This finding suggests that active monitoring (by large shareholders) and reduced information asymmetry (through better disclosures) reduce agency conflicts and reduce raise the risk to debtholders. Credit ratings are found to increase with plank size, according to a small amounts effect in large decision-making groups. Usually, firms are expected to benefit from better governance if it is able to access funding cheaper and in greater amounts.

В© 2013 Elsevier B. V. All rights reserved.

1 ) Introduction

The separation of ownership and control in public corporations can be described as source of company conflicts where managers vested with decision-making authority make choices inside their own interest rather than in the interest of investors. Generally, managers decide to invest in jobs that require significantly less effort and pose a reduced risk for their human capital even though these kinds of projects tend to be connected with lower earnings (Fama, 1980; Holmstrom, 1999; Bertrand and Mullainathan, 2003).

в€— Related author. Tel.: +61 2 9514 7718; fax: +61 2 9514 7711. Email-based addresses: [email protected] ac. jp (H. Aman), pascal. [email protected] edu. au (P. Nguyen). 1

Tel.: +81 798 54 6343.

0275-5319/$ – see front matter © 2013 Elsevier B. Versus. All privileges reserved.

H. Aman, P. Nguyen / Exploration in Worldwide Business and Finance up to 29 (2013) 14–34


Fairness compensation and active monitoring can mitigate these firm conflicts (Smith and Stulz, 1985; Dechow and Sloan, 1991; Wright et al., 2007). For instance, large investors are recognized to be more effective because of their increased incentives to monitor managing (Shleifer and Vishny, 1986; McConnell and Servaes, 1990). Greater distinction between management and monitoring responsibilities, with the use of independent company directors, should also increase management accountability and lead to better corporate decisions. By and large, good governance involves organizational structures that help reduce firm conflicts by increasing the incentives to select good decisions and removing choices that damage firm value. It logically comes after that the risk to traders should be reduce. In particular, good governance is likely to infuse higher confidence among debtholders the fact that firm will never make decisions that injure their pursuits.

The scientific evidence concerning US firms supports the concept good governance is highly respected by individuals in the credit rating markets. Bhojraj and Sengupta (2003) demonstrate that effective monitoring (proxied by the percentage of institutional ownership) and board freedom (proxied by proportion of outside directors) have a positive influence on credit ratings and a poor influence about bond yields. Ashbaugh-Skaife ainsi que al. (2006) confirm that credit ratings will be positively linked to the level of institutional and plank ownership. Better disclosure and...

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