Corporate governance, risk assessment and cost of debt

Husam Aldamen, Keith Duncan, Raymond McNamara

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

This paper examines the impact of corporate governance practices on the reported cost of contracted debt for Australian listed companies. Good governance decreases the variability in cash flows, reduces the probability of default (reduces default risk), increases the quality of value-relevant information disclosed (reduces the information risk) and thereby lowers the cost of debt (Ashbaugh-Skaife, Collins, and LaFond 2006; Sengupta 1998; Bhojraj and Sengupta 2003; Beekes and Brown 2006; Klein 2002; Easley and O'Hara 2004). Similarly our Australian data confirms that cost of debt is positively related to default and information risks. We show that increased corporate governance reduces default and information risk, thereby lowering cost of debt. However, small companies that adopt higher levels of corporate governance do not benefit through lower cost of debt. This raises questions about the merits of universal adoption of costly governance practices. The evidence suggests that there is a lower cost-benefit payoff for smaller firms than larger firms at least in terms of reducing the cost of debt.
Original languageEnglish
Pages1-32
Number of pages32
Publication statusPublished - 2010
EventAccounting and Finance Association of Australia and New Zealand (AFAANZ) conference - Darwin, Darwin, Australia
Duration: 3 Jul 20115 Jul 2011
http://www.afaanz.org/conferences

Conference

ConferenceAccounting and Finance Association of Australia and New Zealand (AFAANZ) conference
Abbreviated titleAFAANZ 2011
CountryAustralia
CityDarwin
Period3/07/115/07/11
Internet address

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Cost of debt
Corporate governance
Risk assessment
Default risk
Information risk
Cash flow
Large firms
Governance
Listed companies
Probability of default
Cost-benefit
Small firms
Small companies

Cite this

Aldamen, H., Duncan, K., & McNamara, R. (2010). Corporate governance, risk assessment and cost of debt. 1-32. Paper presented at Accounting and Finance Association of Australia and New Zealand (AFAANZ) conference, Darwin, Australia.
Aldamen, Husam ; Duncan, Keith ; McNamara, Raymond. / Corporate governance, risk assessment and cost of debt. Paper presented at Accounting and Finance Association of Australia and New Zealand (AFAANZ) conference, Darwin, Australia.32 p.
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Aldamen, H, Duncan, K & McNamara, R 2010, 'Corporate governance, risk assessment and cost of debt' Paper presented at Accounting and Finance Association of Australia and New Zealand (AFAANZ) conference, Darwin, Australia, 3/07/11 - 5/07/11, pp. 1-32.

Corporate governance, risk assessment and cost of debt. / Aldamen, Husam; Duncan, Keith; McNamara, Raymond.

2010. 1-32 Paper presented at Accounting and Finance Association of Australia and New Zealand (AFAANZ) conference, Darwin, Australia.

Research output: Contribution to conferencePaperResearchpeer-review

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AB - This paper examines the impact of corporate governance practices on the reported cost of contracted debt for Australian listed companies. Good governance decreases the variability in cash flows, reduces the probability of default (reduces default risk), increases the quality of value-relevant information disclosed (reduces the information risk) and thereby lowers the cost of debt (Ashbaugh-Skaife, Collins, and LaFond 2006; Sengupta 1998; Bhojraj and Sengupta 2003; Beekes and Brown 2006; Klein 2002; Easley and O'Hara 2004). Similarly our Australian data confirms that cost of debt is positively related to default and information risks. We show that increased corporate governance reduces default and information risk, thereby lowering cost of debt. However, small companies that adopt higher levels of corporate governance do not benefit through lower cost of debt. This raises questions about the merits of universal adoption of costly governance practices. The evidence suggests that there is a lower cost-benefit payoff for smaller firms than larger firms at least in terms of reducing the cost of debt.

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Aldamen H, Duncan K, McNamara R. Corporate governance, risk assessment and cost of debt. 2010. Paper presented at Accounting and Finance Association of Australia and New Zealand (AFAANZ) conference, Darwin, Australia.