A Cross-Country Study of the Effects of Corporate Governance Mechanisms on Risk-Taking, Credit Rating and Cost of Capital

The study empirically examines three main issues. First, the study examines the relationship between corporate governance and risk-taking. Second, the study investigates the association between corporate governance and credit rating. Third, the study examines the link between corporate governance and cost of capital. Corporate governance was represented in this study by the mechanisms of corporate governance index, ownership structure and board structure, and firm performance was represented by risk-taking, credit rating and cost of capital. Using a sample of 200 companies from 10 OECD countries over the 2010 to 2014 period and relying on a multi-theoretical framework, the findings are as follows. First, the results suggest that firms with good corporate governance are shown to engage less risk-taking. Second, the findings indicate that firms with good corporate governance generally have higher credit ratings than firms with poor corporate governance. Third, the results suggest that firms with good corporate governance generally have lower cost of capital than firms with poor corporate governance. Ownership structure and board structure, as representatives of corporate governance, all demonstrated similar results. Differences among firms were seen in terms of legal and accounting traditions, as well as in terms of culture. Yet, the findings appeared to be relatively consistent across Anglo-American and Continental European traditions, despite the fact that there was different emphasis placed on some corporate governance mechanisms, and despite different cultural characteristics. The findings are robust to endogeneity problems, alternative measures and estimation techniques used such as two-stage least squares, lagged reports and fixed effects reports. Overall, the findings have major implications for regulators, academics and practitioners.