재무연구 제 권 호 (2010년 5월)
Asian Review of Financial Research, Vol., No..
pp.767~800
pp.767~800
Equity or Debt Financing: Does Good Corporate Governance Matter?
Vivek Mande White, Nelson Professor of Accounting California State University, Fullerton
Young K. Park Professor of Finance Sungkyunkwan University
Myungsoo Son Associate Professor of Accounting California State University, Fullerton
We examine whether good corporate governance plays a role in influencing a firm’s financing policy. Specifically, we hypothesize that firms with strong governance tend to prefer stocks over long-term debt. We argue that this is because strong governance reduces information asymmetry between providers of capital (equity investors) and users of capital (managers). While the reduction of information asymmetry has positive connotations for both equity and debt financing, we argue that there is a more significant effect on equity financing. Our test results are consistent with this prediction. We find that equity is preferred to debt financing in firms with high quality governance. This finding contradicts an alternative theory, the pecking order hypothesis, which suggests that firms will issue equity as their last resort. Our results suggest, instead, that strong governance can lower agency costs to a level where equity becomes more attractive to debt as a method of long-term financing.
Vivek Mande
Young K. Park
Myungsoo Son
We examine whether good corporate governance plays a role in influencing a firm’s financing policy. Specifically, we hypothesize that firms with strong governance tend to prefer stocks over long-term debt. We argue that this is because strong governance reduces information asymmetry between providers of capital (equity investors) and users of capital (managers). While the reduction of information asymmetry has positive connotations for both equity and debt financing, we argue that there is a more significant effect on equity financing. Our test results are consistent with this prediction. We find that equity is preferred to debt financing in firms with high quality governance. This finding contradicts an alternative theory, the pecking order hypothesis, which suggests that firms will issue equity as their last resort. Our results suggest, instead, that strong governance can lower agency costs to a level where equity becomes more attractive to debt as a method of long-term financing.
