The effect of corporate governance on the cost of bank loans

Abstract

In this paper we try to investigate the effect of corporate governance on the cost of external debt financing. Using a sample of North American companies from 1990 to 2006, we find that high corporate governance levels raises a company’s credit rating by the agencies leading to an increase in external financing capacity by lowering the cost debt. We also put a spotlight on specified corporate governance areas and their effect on the cost of bank loans. Our results suggest that banks take into account the risk of poor corporate governance when pricing and designing debt contracts.