The Association Between Corporate Governance, Risk Assessment and Debt Contracting

Abstract

This thesis examines the relationship between corporate governance, risk assessment and debt contracting within the Australian context where companies are heavily reliant on intermediated debt financing. The Debt Contracting Model (DCM) posits that higher levels of corporate governance decrease the variability in cash flows and reduce the probability of default (reduce default risk) and correspondingly also increase the quality of valuerelevant information disclosed (reduce information risk). As a result of influencing risk assessment, higher levels of corporate governance are expected to increase access to the quantity and type of debt and to lower cost of debt. The empirical evidence largely supports the relationships proposed in the DCM. In particular, higher levels of corporate governance are associated with an increase in access to bank debt through the reduction of risk. Furthermore, there is evidence that higher levels of corporate governance lower the cost of debt for all debt types via the impact on risk assessment. However, these results are driven by the larger companies. The evidence shows that smaller companies do not access more quantities or types of debt nor do they pay lower cost of debt in the presence of higher levels of corporate governance. These results add to the body of accounting research by establishing the importance of corporate governance for debt contracting in markets that depend heavily on intermediated debt. More importantly, the evidence suggests that there is a lower cost-benefit trade-off for smaller companies than larger companies at least in terms of increasing access to debt and reducing cost of debt. Consequently, this study could assist regulators in raising questions about the merits of the universal adoption of costly corporate governance.

Date of Award	9 Oct 2010
Original language	English
Supervisor	Keith Duncan (Supervisor)