Abstract
This study investigates the effects of governance structure on the relationship between disclosure quality and credit ratings. Firms with greater control-ownership divergence are more likely to pursue their private interests because controlling shareholders obtain the benefit of managerial decision in accordance with controlling interest and they bear the related risk only to the shareholding value. The greater divergence decreases the level of disclosure, thereby increasing the information asymmetry and agency problems, and, ultimately may be harmful to the firms’ sustainability. We analyze data from the listed Korean companies belonging to a large business group that issued corporate bonds for the period 2003–2015, and find that there is a positive relationship between fair disclosure and credit ratings; however, it is weakened as the control-ownership divergence increases. These results suggest that firms with a high quality of disclosure are assigned better credit ratings. However, if their governance structures are poor, the capital market may penalize the reliability of the released information.
Highlights
Disclosure may play a role in eventually enhancing the sustainability of a firm by building trust among its stakeholders
This study investigated the effects of corporate ownership structure on the relationship between disclosure quality and credit ratings
Using the data for the listed Korean companies belonging to a large business group from 2003 to 2015, we find that there is a positive relationship between disclosure quality and credit ratings, this positive impact is reduced as the control-ownership divergence increases
Summary
Disclosure may play a role in eventually enhancing the sustainability of a firm by building trust among its stakeholders. When Mattel was in a crisis in 2007 due to its toys being covered in lead-paint, Robert Eckert, Chief Executive Officer, immediately apologized and voluntarily recalled millions of toys. Mattel’s commitment to solving the problem came through in their sincere explanations of the reasons for the recall. Mattel rebuilt its damaged reputation and regained the trust of its stakeholders. Doosan was suspected of deliberately delaying the disclosure and the reliability of the company was damaged. In such cases, it is expected that firms with higher disclosure quality will gain more trust in the capital market
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