The Cost of Debt Capital and Corporate Governance Practices

Abstract

This study examines the association between the cost of debt capital and corporate governance practices. Utilizing a unique data set of firm-level corporate governance practices that is provided by the Korea Corporate Governance Service (KCGS), this study examines whether sound corporate governance practices reduce agency costs and thus the default risk and cost of debt capital of a firm. The findings indicate that corporate governance practices are negatively related to the cost of debt capital after controlling for relevant control variables and that the association between the cost of debt capital and corporate governance practices is more pronounced in firms that have assets of more than 2 trillion won (approximately US$2 billion). Thus, the results strongly suggest that sound corporate governance practices work favorably to lower the cost of external debt financing.