Does good governance matter to debtholders? Evidence from the credit ratings of Japanese firms

Consistent with existing evidence based on US firms, we show that good governance is associated with higher credit ratings. The most significant variables are institutional ownership and disclosure quality. This finding suggests that active monitoring (by large shareholders) and lower information asymmetry (through better disclosures) mitigate agency conflicts and reduce the risk to debtholders. Credit ratings are also found to increase with board size, consistent with a moderation effect in large decision-making groups. As a rule, firms are expected to benefit from better governance by being able to access funding at a lower cost and in larger amounts.

Graphical abstractFigure optionsDownload full-size imageDownload as PowerPoint slideHighlights► Good governance is associated with higher credit rating. ► Most influential variables are board size, institutional ownership, and disclosure quality. ► Greater monitoring and transparency lower the risk to investors. ► Indication of moderation effect and diversification of opinion in large decision-making groups. ► Good governance firms increase their financial strength over time.