Governance structure and cost of debt

Abdelkader Derbali ORCID logo, Lamia Jamel ORCID logo, Mohamed Bechir Chenguel ORCID logo, Ali Lamouchi ORCID logo, Ahmed K Elnagar ORCID logo, Monia Ben Ltaifa ORCID logo

DOI:10.22495/cgobrv4i1p4

Abstract

The purpose of this paper is to examine if creditors take account of the firm’s governance attributes to decide the cost of debt. Using a sample of 486 US firms over the period 1998-2017, we synthesized governance in six factorial axes. We have demonstrated that the quality audit (independence, frequency of meetings, auditor’s reputation, there is a charter) and financial expertise (percentage of financial experts and ownership of institutional investors) are informative tools creditors that provide information on the quality and reliability of financial reporting. They affect negatively and significantly the cost of debt. Moreover, creditors appreciate the presence of independent directors on the board and reduce the cost of debt required. Furthermore, the independence of the nomination and compensation committees prove irrelevant attributes of governance perspective because creditors do not reduce their risk of the agency. However, the attributes of the board (the size, the number of meetings, the existence of specialized committees, and meetings) are misunderstood by creditors that will increase the interest rate. In addition, the cost of debt increases with the concentration of managerial ownership and majority shareholders. Similarly, attributes reflecting the managerial entrenchment (duality of CEO tenure) are positively correlated to the cost of debt.

Keywords: Cost of Debt, Creditors’ Behavior, Governance Mechanisms, American Firms

Authors’ individual contribution: Conceptualization – A.D. and L.J.; Methodology – A.D., A.L., and M.B.C.; Software – A.K.E. and M.B.L.; Validation – A.D., L.J., and A.K.E.; Formal Analysis – M.B.L. and A.L.; Investigation – A.D., M.B.L., and L.J.; Resources – A.D.; Data Curation – A.D. and A.K.E.; Writing – L.J. and A.D.; Supervision – A.D.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: O16, G34, H63

Received: 28.11.2019
Accepted: 29.05.2020
Published online: 10.06.2020

How to cite this paper: Derbali, A., Jamel, L., Chenguel, M. B., Lamouchi, A., Elnagar, A. K., & Ltaifa, M. B. (2020). Governance structure and cost of debt. Corporate Governance and Organizational Behavior Review, 4(1), 41-53. http://doi.org/10.22495/cgobrv4i1p4



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