Corporate Governance Reform and the Cost of Debt Financing of Listed French Companies

Abstract

This study investigates the effects of governance characteristics on debt financing costs for listed French companies using corporate governance guidelines issued during the late nineties. Although the French system is strongly debt-oriented, creditor legal protection is weak and financial institutions have few direct internal monitoring channels (i.e., presence on the Board of Directors). We postulate, therefore, that they value the quality of corporate governance when determining loan conditions. Using a 1999-2001 sample of large, non-financial listed companies, we find an inverse relation between the ex post cost of debt and three corporate governance quality attributes: (1) Board independence, (2) the existence of a compensation committee composed of non-executive directors, and (3) the presence of significant institutional shareholders in the firm’s equity. However, the existence of an independent audit committee provides no significant benefits. These results are robust to firm size effects and to a large set of firm-specific characteristics. This study provides empirical support for the benefits of more effective monitoring of debtholders’ agency risk, but does not support accounting-auditing monitoring benefits regarding debtholders’ information risk. This might be explained by the very limited use of debt covenants in France at the time of the study. This study offers insights to financial institutions for benchmarking the quality of borrowers’ corporate governance, and in creating more optimal contract provisions in loan agreements. It also provides suggestions for corporate officers in the negotiation of interest rates with lenders.