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Corporate Governance and the Cost of Borrowing

Frantz, Pascal and Instefjord, Norvald (2013) 'Corporate Governance and the Cost of Borrowing.' Journal of Business Finance & Accounting, 40 (7-8). pp. 918-948. ISSN 0306-686X

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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. Finally, we find that the strength of the governance mechanism can influence the incentives to carry out risk shifting. © 2013 John Wiley & Sons Ltd.

Item Type: Article
Uncontrolled Keywords: benefit diversions; corporate governance; cost of borrowing; default
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 16 Sep 2013 15:18
Last Modified: 18 Aug 2022 11:05
URI: http://repository.essex.ac.uk/id/eprint/7739

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