Abstract
We explore the effect of governance on the costs and ratings of firms' bonds. We use the wedge between the voting and cash-flow rights of the controlling shareholders and the identity of the ultimate owners to proxy for the strength of the internal governance mechanisms. We find strong evidence that the voting/cash-flow rights wedge and the family control have a positive and significant effect on bond costs and a negative and significant effect on bond ratings. Moreover, our results suggest that control in the hands of widely held financial firms has a positive effect on bond ratings only, and that State control has no effect on either bond costs or ratings. When we control for national governance systems, we find that a higher protection of debtholders' rights generally reduces bond costs and increases corporate bond ratings. More importantly, we find that what really matters for both bondholders and rating agencies is debt laws enforcement rather than the existence of those laws themselves.
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