Corporate governance, credit rating and business cycles
Date
2014
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of Delaware
Abstract
Corporate governance has the function of mitigating agency cost, through which it has impacts on shareholders and bondholders. Using a data sample of S&P; 1500 companies over the period of 1996-2011, I study the relationship between corporate governance and credit ratings controlling for the state of the business cycle. I find that in addition to mitigating agency cost, corporate governance also has a second function to promote decision efficiency and bondholders' demand for this function varies along the states of business cycles. More specifically, when the economy is in a recession where risk levels are relatively higher, bondholders demand more from corporate governance to mitigate agency cost, while in booms, the demand is higher for decision efficiency.