Abstract

My dissertation explores the importance of corporate governance from the perspective of bondholders of samples of US financial and industrial firms. It consists of three related essays which collectively cohere to represent my understanding of the topic. The conflicts of interest between creditors and shareholders and between corporate insiders and outside capital providers are addressed to explain the impact of a comprehensive governance mechanisms on bondholder wealth, which is measured either by the default probability implied by the structure credit model or by Credit Default Swap (CDS) spread. I consider both the non-crisis and crisis periods through different essays, which provide the ideal setting to examine the effectiveness of governance on bondholder wealth for different market conditions. Specifically, I explain how important governance provisions affect a manager’s opportunistic behavior, a firm’s investment decision and risk-taking behavior, and information environment, which in turn affect bondholder wealth. Such governance provisions include internal governance mechanism, such as the role played by the board of directors and a firm’s equity ownership structure, and external governance provisions through the market for corporate control and the trading activities of institutional investors. My dissertation serves to advance the governance literature in several dimensions: a) it re-examines the usefulness of shareholder favorable governance provisions from a different angle through the eye of creditors, and tries to explain why some shareholder governance provisions turn out to be ineffective; b) it compares the riskiness of financial and non-financial firms, and how creditors view governance factors differently for two types of firms; c) it emphasizes the role of institutional investors and tests how their investment horizons and ownership levels affect industrial firms’ riskiness, and how such an impact varies across different market conditions. My general results show that governance attributes have a significant impact on a firm’s credit risk, and this impact varies across the type of the firm. Ownership structure and takeover vulnerability are more important for non-financial firms than for financial firms. Board structure and accounting transparency have greater impact on financial firms. When I restrict to a sample of banks and use the credit risk model to estimate default risk, the impact of board structure remains. Given the important governance role of equity ownership structure for non-financial firms and the importance of institutional investors in the U.S. capital markets, I specifically look at institutional monitoring on industrial firms’ credit risk. My results show that institutional investment horizon, ownership structure, trading behavior and market conditions are all important determinants of industrial firms’ credit risk.