The Financing Structures of Firms with Poor Corporate Governance

Abstract

Previous studies claim that firms with poor corporate governance are likely to encounter significant difficulties in raising external financing, but not much is known about their financing structures. This paper examines the financing structures of firms with corporate governance problems associated with the divergence in the controlling shareholders' voting and cash-flow rights. We find that firms with more severe corporate governance problems use significantly more bank debt, have a higher proportion of short-term debt, and utilize more trade credit. Our findings suggest that bank debt, short-term debt, and trade credits have comparative advantages over other risky capital in managing corporate governance problems.