Does adopting good corporate governance impact the cost of intermediated and non-intermediated debt?

This study examines the impact of good corporate governance practices on the reported cost of debt for Australian listed companies. Prior research has established that governance lowers the cost of non-intermediated debt (Sengupta, 1998; Bhojraj and Sengupta, 2003; Ashbaugh-Skaife, 2006). We extend this analysis to the Australian corporate debt market which is dominated by intermediated or privately held debt. Our findings are consistent with the prior work and shows that increased corporate governance lowers cost of debt. However, when we split the sample companies into intermediated and non-intermediated debt sub-samples, we find this result only holds for the non-intermediated debt sub-sample. Furthermore, we find that small companies that adopt better corporate governance practices do not benefit through lower cost of debt. This raises questions about the merits of universal adoption of costly governance practices.