The Relationship between Corporate Governance and Bond Ratings: The Role of Institutional Investors and Directors

• Main Authors: Te-Chin Chang Chien, 張簡德欽
• Other Authors: Chiung-Feng Ko
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/41709747394690108885

碩士 === 東吳大學 === 會計學系 === 93 === Today the debt market becomes larger and investors usually pay more attention to debt-paying ability of firms. It’s very important for investors to know the probability of default of debt. The bond rating made by rating agency could provide investors with relevant credit information that are helpful for investor''s decision-making. Existing researches have identified several financial risk characteristics of firm and one of which shows that the debt issuance is a rating-influencing factor. Also, a firm’s default risk would depend on the accurately credible information and agency costs, with which consists of two dimensions between the firms and the lenders. Governance mechanisms can affect the assessment of default likelihood in both dimensions. This study uses 87 industrial bond issues sample over 1999-2003 and ordered logit model to examine whether governance mechanisms have influence on bond ratings. Following main findings are reached through this study: 1. The Percentage of common stock held by institutional investors and board members are positively associated with bond ratings. However, concentrated institutional ownership could result in institutions influencing firm decision that could prove costly to other providers of capital. 2. Pledged shares ratio of directors’ and supervisors’ shareholdings is negatively associated with bond ratings. 3. Pledged shares ratio of directors’ and supervisors’ shareholdings has stronger effects on bond ratings for lower rated bonds. Anyway, this study provides evidence linking governance mechanisms to higher bond ratings. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders.