How Corporate Governance Practices Affect the Cost of Debt: A Cross-Country Comparison of Pakistan and India
Abstract
This study empirically examines the association between corporate governance practices and the cost of debt in Pakistan and India. By law, both Pakistani and Indian firms are required to publish their annual reports with recommended Corporate Governance Codes. Corporate governance practices were pivotal in the U.S. stock market crash of 1929. In this study, we used data from 2014 to 2017 of published compliance from 100 nonfinancial companies in Pakistan and India. This study discloses the essentiality of better corporate governance to decrease the cost of debt and offers additional empirical evidence through a comparative analysis of the links between corporate governance and the cost of debt in Pakistan and India.
Keywords: corporate governance, cost of debt, Pakistan, India
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References
Allam, B. S. (2018). The Impact of Board Characteristics and Ownership Identity on Agency Costs and Firm Performance: UK Evidence. Corporate Governance: The International Journal of Business in Society, 18(6), 1147–1176. https://doi.org/10.1108/CG-09-2016-0184.
Anderson, J. E., & Van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. American economic review, 93(1), 170-192.
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt. Journal of accounting and economics, 37(3), 315-342.
A Asante-Darko, D., Bonsu, B. A., Famiyeh, S., Kwarteng, A., & Goka, Y. (2018). Governance structures, cash holdings and firm value on the Ghana stock exchange. Corporate Governance: The International Journal of Business in Society, Society, 18(4), 671–685. https://doi.org/10.1108/CG-07-2017-0148.
Ashbaugh-Skaife, Hollis, Daniel W. Collins, and Ryan LaFond. “The Effects of Corporate Governance on Firms’ Credit Ratings.” Journal of Accounting and Economics, Conference Issue on Implications of Changing Financial Reporting Standards, 42, no. 1 (October 1, 2006): 203–243. https://doi.org/10.1016/j.jacceco.2006.02.003.
A Assenga, M. P., Aly, D., & Hussainey, K. (2018). The impact of board characteristics on the financial performance of Tanzanian firms. Corporate Governance: The international journal of business in society, 18(6), 1089–1106. https://doi.org/10.1108/CG-09-2016-0174.
Baltagi, B. H., Bratberg, E., & Holmås, T. H. (2005). A panel data study of physicians' labor supply: the case of Norway. Health Economics, 14(10), 1035-1045. https://doi.org/10.1002/hec.991.
Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Lapides, P. D. (2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting horizons, 14(4), 441-454. https://doi.org/10.2308/acch.2000.14.4.441.
Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time-series cross-section data. American political science review, 89(3), 634-647.
Berle, A. A. (1932). For whom corporate managers are trustees: a note. Harvard law review, 45(8), 1365-1372.
Berlin, M., & Loeys, J. (1988). Bond covenants and delegated monitoring. The Journal of Finance, 43(2), 397-412. https://doi.org/10.1111/j.1540-6261.1988.tb03946.x.
Bharath, S. T., & Shumway, T. (2008). Forecasting default with the Merton distance to default model. The Review of Financial Studies, 21(3), 1339-1369.
Bhojraj, S., & Sengupta, P. (2003). Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. The journal of Business, 76(3), 455-475.
Black, B. S., De Carvalho, A. G., & Gorga, É. (2012). What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries). Journal of Corporate Finance, 18(4), 934-952. https://doi.org/10.1016/j.jcorpfin.2011.10.001.
Bodie, Z., & Taggart, R. A. (1978). Future investment opportunities and the value of the call provision on a bond. The Journal of Finance, 33(4), 1187-1200. https://doi.org/10.2307/2326948.
Butt, S. A., & Hasan, A. (2009). Impact of ownership structure and corporate governance on capital structure of Pakistani listed companies. International Journal of Business & Management, 4(2). https://papers.ssrn.com/abstract=1732511.
Cadbury, A. (1992). The Financial Aspects of Corporate Governance. London: The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd.
Carcello, J. V., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The accounting review, 75(4), 453-467.
Chava, S., & Purnanandam, A. (2010). CEOs versus CFOs: Incentives and corporate policies. Journal of financial Economics, 97(2), 263-278. https://doi.org/10.1016/j.jfineco.2010.03.018.
Chava, S., Kumar, P., & Warga, A. (2010). Managerial agency and bond covenants. The Review of Financial Studies, 23(3), 1120-1148.
Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging markets review, 15, 1-33.
Coles, J. L., & Hoi, C. K. (2003). New evidence on the market for directors: Board membership and Pennsylvania Senate Bill 1310. The Journal of Finance, 58(1), 197-230.
Denis, D. K. (2001). Twenty-five years of corporate governance research… and counting. Review of financial economics, 10(3), 191-212. https://doi.org/10.1016/S1058-3300(01)00037-4.
Crespí-Cladera, R., & Martín‐Oliver, A. (2015). Do family firms have better access to external finance during crises?. Corporate Governance: An International Review, 23(3), 249-265. https://onlinelibrary.wiley.com/doi/abs/10.1111/corg.12100.
Durnev, A., & Kim, E. H. (2005). To steal or not to steal: Firm attributes, legal environment, and valuation. The Journal of finance, 60(3), 1461-1493.
Ertugrul, M., & Hegde, S. (2008). Board compensation practices and agency costs of debt. Journal of Corporate Finance, 14(5), 512-531. https://doi.org/10.1016/j.jcorpfin.2008.09.004.
FA Khatib, S., Feriha Abdullah, D., Hendrawaty, E., & Suleiman Yahaya, I. (2020). Corporate governance mechanisms and capital structure. International Journal of Advanced Science and Technology, 29(10S), 993-1003.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.
Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of accounting and economics, 39(2), 295-327.
Geertz-Hansen, O., Sand-Jensen, K. A. J., Hansen, D. F., & Christiansen, A. (1993). Growth and grazing control of abundance of the marine macroalga, Ulva lactuca L. in a eutrophic Danish estuary. Aquatic Botany, 46(2), 101-109. https://doi.org/10.1016/0304-3770(93)90039-Y.
Greenbury, R. (1995). Directors’ Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury. Gee Publishing.
Grossman, S. J., & Hart, O. D. (1982). Corporate financial structure and managerial incentives. In The economics of information and uncertainty (pp. 107-140). University of Chicago Press.
Harvey, C. R., Lins, K. V., & Roper, A. H. (2004). The effect of capital structure when expected agency costs are extreme. Journal of financial economics, 74(1), 3-30. https://doi.org/10.1016/j.jfineco.2003.07.003.
Hill, C. W., & Jones, T. M. (1992). Stakeholder‐agency theory. Journal of management studies, 29(2), 131-154.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
John, T. A. (1993). Accounting measures of corporate liquidity, leverage, and costs of financial distress. Financial Management, 91-100.
Kirkpatrick, G. (2009). The corporate governance lessons from the financial crisis. OECD Journal: Financial Market Trends, 2009(1), 61-87.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of financial economics, 58(1-2), 3-27.
La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. The journal of finance, 52(3), 1131-1150.
Larcker, D. F., & Richardson, S. A. (2004). Fees paid to audit firms, accrual choices, and corporate governance. Journal of accounting research, 42(3), 625-658.
Maddala, G. S., & Lahiri, K. (2009). Introduction to Econometrics, 4th Editon. John Wiley & Sons Ltd.
McMullen, D. A., & Raghunandan, K. (1996). Enhancing audit committee effectiveness. Journal of Accountancy, 182(2), 79.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175.
Patton, A., & Baker, J. C. (1987). Why Wont Directors Rock the Boat. Harvard Business Review, 65(6), 10.
Persons, O. S. (2005). The relation between the new corporate governance rules and the likelihood of financial statement fraud. Review of Accounting and Finance.
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The journal of finance, 49(1), 3-37.
Piazza, C. C., Hanley, G. P., & Fisher, W. W. (1996). Functional analysis and treatment of cigarette pica. Journal of applied behavior analysis, 29(4), 437-450.
Piot, C., & Missonier-Piera, F. (2007). Corporate governance, audit quality and the cost of debt financing of French listed companies. Communication présentée au 28ème Congrès de l’Association Francophone de Comptabilité, Poitiers.
Preda, A. (1999). The turn to things: Arguments for a sociological theory of things. The sociological quarterly, 40(2), 347-366.
Reed, W. R., & Ye, H. (2011). Which panel data estimator should I use?. Applied economics, 43(8), 985-1000.
Schauten, M., & Blom, J. (2006). Corporate Governance and the Cost of Debt (SSRN Scholarly Paper ID 933615). Social Science Research Network. https://doi.org/10.2139/ssrn.933615
Williamson, O. E. (1979). Transaction-cost economics: the governance of contractual relations. The journal of Law and Economics, 22(2), 233-261.
Anderson, J. E., & Van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. American economic review, 93(1), 170-192.
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt. Journal of accounting and economics, 37(3), 315-342.
A Asante-Darko, D., Bonsu, B. A., Famiyeh, S., Kwarteng, A., & Goka, Y. (2018). Governance structures, cash holdings and firm value on the Ghana stock exchange. Corporate Governance: The International Journal of Business in Society, Society, 18(4), 671–685. https://doi.org/10.1108/CG-07-2017-0148.
Ashbaugh-Skaife, Hollis, Daniel W. Collins, and Ryan LaFond. “The Effects of Corporate Governance on Firms’ Credit Ratings.” Journal of Accounting and Economics, Conference Issue on Implications of Changing Financial Reporting Standards, 42, no. 1 (October 1, 2006): 203–243. https://doi.org/10.1016/j.jacceco.2006.02.003.
A Assenga, M. P., Aly, D., & Hussainey, K. (2018). The impact of board characteristics on the financial performance of Tanzanian firms. Corporate Governance: The international journal of business in society, 18(6), 1089–1106. https://doi.org/10.1108/CG-09-2016-0174.
Baltagi, B. H., Bratberg, E., & Holmås, T. H. (2005). A panel data study of physicians' labor supply: the case of Norway. Health Economics, 14(10), 1035-1045. https://doi.org/10.1002/hec.991.
Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Lapides, P. D. (2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting horizons, 14(4), 441-454. https://doi.org/10.2308/acch.2000.14.4.441.
Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time-series cross-section data. American political science review, 89(3), 634-647.
Berle, A. A. (1932). For whom corporate managers are trustees: a note. Harvard law review, 45(8), 1365-1372.
Berlin, M., & Loeys, J. (1988). Bond covenants and delegated monitoring. The Journal of Finance, 43(2), 397-412. https://doi.org/10.1111/j.1540-6261.1988.tb03946.x.
Bharath, S. T., & Shumway, T. (2008). Forecasting default with the Merton distance to default model. The Review of Financial Studies, 21(3), 1339-1369.
Bhojraj, S., & Sengupta, P. (2003). Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. The journal of Business, 76(3), 455-475.
Black, B. S., De Carvalho, A. G., & Gorga, É. (2012). What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries). Journal of Corporate Finance, 18(4), 934-952. https://doi.org/10.1016/j.jcorpfin.2011.10.001.
Bodie, Z., & Taggart, R. A. (1978). Future investment opportunities and the value of the call provision on a bond. The Journal of Finance, 33(4), 1187-1200. https://doi.org/10.2307/2326948.
Butt, S. A., & Hasan, A. (2009). Impact of ownership structure and corporate governance on capital structure of Pakistani listed companies. International Journal of Business & Management, 4(2). https://papers.ssrn.com/abstract=1732511.
Cadbury, A. (1992). The Financial Aspects of Corporate Governance. London: The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd.
Carcello, J. V., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The accounting review, 75(4), 453-467.
Chava, S., & Purnanandam, A. (2010). CEOs versus CFOs: Incentives and corporate policies. Journal of financial Economics, 97(2), 263-278. https://doi.org/10.1016/j.jfineco.2010.03.018.
Chava, S., Kumar, P., & Warga, A. (2010). Managerial agency and bond covenants. The Review of Financial Studies, 23(3), 1120-1148.
Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging markets review, 15, 1-33.
Coles, J. L., & Hoi, C. K. (2003). New evidence on the market for directors: Board membership and Pennsylvania Senate Bill 1310. The Journal of Finance, 58(1), 197-230.
Denis, D. K. (2001). Twenty-five years of corporate governance research… and counting. Review of financial economics, 10(3), 191-212. https://doi.org/10.1016/S1058-3300(01)00037-4.
Crespí-Cladera, R., & Martín‐Oliver, A. (2015). Do family firms have better access to external finance during crises?. Corporate Governance: An International Review, 23(3), 249-265. https://onlinelibrary.wiley.com/doi/abs/10.1111/corg.12100.
Durnev, A., & Kim, E. H. (2005). To steal or not to steal: Firm attributes, legal environment, and valuation. The Journal of finance, 60(3), 1461-1493.
Ertugrul, M., & Hegde, S. (2008). Board compensation practices and agency costs of debt. Journal of Corporate Finance, 14(5), 512-531. https://doi.org/10.1016/j.jcorpfin.2008.09.004.
FA Khatib, S., Feriha Abdullah, D., Hendrawaty, E., & Suleiman Yahaya, I. (2020). Corporate governance mechanisms and capital structure. International Journal of Advanced Science and Technology, 29(10S), 993-1003.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.
Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of accounting and economics, 39(2), 295-327.
Geertz-Hansen, O., Sand-Jensen, K. A. J., Hansen, D. F., & Christiansen, A. (1993). Growth and grazing control of abundance of the marine macroalga, Ulva lactuca L. in a eutrophic Danish estuary. Aquatic Botany, 46(2), 101-109. https://doi.org/10.1016/0304-3770(93)90039-Y.
Greenbury, R. (1995). Directors’ Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury. Gee Publishing.
Grossman, S. J., & Hart, O. D. (1982). Corporate financial structure and managerial incentives. In The economics of information and uncertainty (pp. 107-140). University of Chicago Press.
Harvey, C. R., Lins, K. V., & Roper, A. H. (2004). The effect of capital structure when expected agency costs are extreme. Journal of financial economics, 74(1), 3-30. https://doi.org/10.1016/j.jfineco.2003.07.003.
Hill, C. W., & Jones, T. M. (1992). Stakeholder‐agency theory. Journal of management studies, 29(2), 131-154.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
John, T. A. (1993). Accounting measures of corporate liquidity, leverage, and costs of financial distress. Financial Management, 91-100.
Kirkpatrick, G. (2009). The corporate governance lessons from the financial crisis. OECD Journal: Financial Market Trends, 2009(1), 61-87.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of financial economics, 58(1-2), 3-27.
La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. The journal of finance, 52(3), 1131-1150.
Larcker, D. F., & Richardson, S. A. (2004). Fees paid to audit firms, accrual choices, and corporate governance. Journal of accounting research, 42(3), 625-658.
Maddala, G. S., & Lahiri, K. (2009). Introduction to Econometrics, 4th Editon. John Wiley & Sons Ltd.
McMullen, D. A., & Raghunandan, K. (1996). Enhancing audit committee effectiveness. Journal of Accountancy, 182(2), 79.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175.
Patton, A., & Baker, J. C. (1987). Why Wont Directors Rock the Boat. Harvard Business Review, 65(6), 10.
Persons, O. S. (2005). The relation between the new corporate governance rules and the likelihood of financial statement fraud. Review of Accounting and Finance.
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The journal of finance, 49(1), 3-37.
Piazza, C. C., Hanley, G. P., & Fisher, W. W. (1996). Functional analysis and treatment of cigarette pica. Journal of applied behavior analysis, 29(4), 437-450.
Piot, C., & Missonier-Piera, F. (2007). Corporate governance, audit quality and the cost of debt financing of French listed companies. Communication présentée au 28ème Congrès de l’Association Francophone de Comptabilité, Poitiers.
Preda, A. (1999). The turn to things: Arguments for a sociological theory of things. The sociological quarterly, 40(2), 347-366.
Reed, W. R., & Ye, H. (2011). Which panel data estimator should I use?. Applied economics, 43(8), 985-1000.
Schauten, M., & Blom, J. (2006). Corporate Governance and the Cost of Debt (SSRN Scholarly Paper ID 933615). Social Science Research Network. https://doi.org/10.2139/ssrn.933615
Williamson, O. E. (1979). Transaction-cost economics: the governance of contractual relations. The journal of Law and Economics, 22(2), 233-261.
Published
2021-07-25
How to Cite
NAZIR, Muhammad Umair.
How Corporate Governance Practices Affect the Cost of Debt: A Cross-Country Comparison of Pakistan and India.
Jurnal Ilmiah Akuntansi dan Bisnis, [S.l.], v. 16, n. 2, p. 187-198, july 2021.
ISSN 2303-1018.
Available at: <https://ojs.unud.ac.id/index.php/jiab/article/view/70753>. Date accessed: 19 apr. 2024.
doi: https://doi.org/10.24843/JIAB.2021.v16.i02.p01.
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