Does good governance matter to debtholders? Evidence from the credit ratings of Japanese firms

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

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Research in International Business and Finance j o ur na l h om ep ag e: w w w . e l s e v i e r . c o m / l o c a t e / r i b a f

Does good governance matter to debtholders?
Evidence from the credit ratings of
Japanese firms
Hiroyuki Aman a,1, Pascal Nguyen b,∗ a School of Business Administration, Kwansei Gakuin University, Uegahara, Nishinomiya,
Hyogo 662-8501, Japan b Faculty of Business, University of Technology Sydney, P.O. Box 123, NSW 2007, Sydney, Australia

a r t i c l e

i n f o

Article history:
Received 15 March 2012
Received in revised form 4 October 2012
Accepted 11 February 2013
Available online xxx
Keywords:
Credit rating
Cost of debt
Funding
Corporate governance
Monitoring
Disclosure

a b s t r a c t
Consistent with existing evidence based on US firms, we show that good governance is associated with higher credit ratings. The most significant variables are institutional ownership and disclosure quality. This finding suggests that active monitoring (by large shareholders) and lower information asymmetry (through better disclosures) mitigate agency conflicts and reduce the risk to debtholders. Credit ratings are also found to increase with board size, consistent with a moderation effect in large decision-making groups. As a rule, firms are expected to benefit from better governance by being able to access funding at a lower cost and in larger amounts. © 2013 Elsevier B.V. All rights reserved.

1. Introduction
The separation of ownership and control in public corporations is a source of agency conflicts whereby managers entrusted with decision-making authority make choices in their own interest rather than in the interest of investors. More often than not, managers choose to invest in projects that require less effort and pose a lower risk to their human capital even though these projects tend

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