Corporate Governance Disclosure And The Assessment Of Default.docVIP

Corporate Governance Disclosure and the Assessment of Default Risk Christina James, University of Southern Queensland, Toowoomba, Australia* and Julie Cotter, University of Southern Queensland, Toowoomba, Australia ABSTRACT This paper investigates whether the quality of a firm’s corporate governance disclosures are inversely related to its assessed default risk. It is expected that high reported standards of corporate governance will reduce the assessment of a company’s default risk by lenders, underwriters and ratings agencies, and therefore reduce the cost of debt for such companies. A corporate governance index based on annual report disclosures was developed to rate each company’s corporate governance disclosure quality. Derivation of this index was centred on corporate governance indicators suggested by prior research and best practice; particularly the Australian Stock Exchange “Principles of Good Corporate Governance and Best Practice Recommendations”. The assessment of default risk is captured by a firm’s individual credit rating supplied by Standard and Poor’s. Our results indicate that annual report disclosures about corporate governance practices are not significantly related to assessed default risk. INTRODUCTION This paper investigates whether the quality of a firm’s corporate governance disclosures are inversely related to its assessed default risk. Lenders are an important group of annual report users, and it is therefore important to know whether the corporate governance disclosures made in these reports are useful for assessing default risk. We investigate this relationship in the Australian setting. It is expected that high perceived standards of corporate governance will reduce the assessment of a company’s default risk by lenders and underwriters, and therefore reduce the cost of debt for such companies. There have been several recent studies investigating the relationship between corporate governance and the cost of debt or factors ex