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The Effects of Corporate Governance on Firms’ Credit Ratings
Hollis Ashbaugh
University of Wisconsin – Madison
hashbaugh@bus.wisc.edu
Daniel W. Collins *
University of Iowa
daniel-collins@uiowa.edu
Ryan LaFond
University of Wisconsin – Madison
rzlafond@wisc.edu
March 2004
Revised, June 2004
* Corresponding author
We would like to thank Sanjeev Bhojraj, Bob Bowen, Tom Dyckman, Paul Hribar, April Klein,S. P. Kothari, Charles Lee, Mark Nelson, Shiva Rajgopal, D. Shores, Joe Weber, Peter Wysocki,and seminar participants at Cornell, Iowa State University, Lancaster University, London
Business School, MIT, and the University of Washington for helpful comments and suggestions.We especially thank Johannes Ledolter for useful discussions on implementation andinterpretation of ordered logit models.The Effects of Corporate Governance on Firms’ Credit Ratings
Abstract
Using a framework for evaluating corporate governance recently developed by Standard & Poor’s, thisstudy investigates whether firms that exhibit strong governance benefit from higher credit ratings relativeto firms with weaker governance. We document, after controlling for risk characteristics, that firm creditratings are: (1) negatively associated

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with the number of blockholders that own at least a 5% ownership in
the firm; (2) positively related to weaker shareholder rights in termsof takeover defenses; (3) positivelyrelated to the degree of financial transparency; and (4) positively related to over-all board independence,
board stock ownership and board expertise, and negatively related to CEO power on the board. We alsoprovide evidence that CEOs of firms with speculative grade credit ratings are overcompensated to a
greater degree than their counterparts at firms with investment grade ratings, and that theovercompensation exceeds the CEO’s share of additional debt costs related to lower credit ratings. Our
study provides insights into the characteristics of governance that are likely to affect the cost of debtfinancing and provides one explanation for why some firms continue to operate with weaker governancewhen doing so may mean lower credit ratings.
Keywords: Corporate governance, Credit rating, Executive compensation
1
The Effects of Corporate Governance on Firms’ Credit Ratings
I. IntroductionThis paper investigates whether firms that possess strong corporate governance benefit from higheroverall credit ratings relative to firms with weak governance. Firms’ overall credit ratings reflect a ratingagency’s opinion of an entity's overall creditworthiness and its capacity to satisfy its financial obligations(Standard and Poor’s 2004). Credit agencies are concerned with governance because weak governancecan impair a firm’s financial position and leave debt stakeholders (hereafter referred to as bondholders)
vulnerable to losses (FitchRatings 2004). To structure our analysis, we adopt the framework recentlydeveloped by Standard and Poor’本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。