The Influence of Corporate Governance on the Cost of Debt in BRICS Countries

This paper proceeds an empirical analysis of the influence of corporate governance on the cost of debt in BRICS countries; the sample covers the issues of corporate bonds during the period 2006-2016. The motivation of the research is the fact that during the instability on the capital markets the need to raise the attractiveness of issued debt instruments and reduce the cost of debt by internal corporate mechanisms becomes extremely relevant. The present analysis reveals that the board composition of the companies from BRICS countries influences the debt holders’ risk in a different way than in developed countries due to the specificity of emerging markets which is reflected in corporate governance practices: the larger size of the board of directors is associated with the higher cost of debt, and the monitoring role of the independent directors is not appreciated by the debt holders in BRICS countries. The major role of independent directors, conversely, is the mitigation of the risk of wealth expropriation by majority shareholders, and the decreasing effect of the board’s independence on the cost of debt is more pronounced in the case of the higher ownership concentration. With regard to ownership concentration, it is associated with the higher cost of debt, as in developed markets, but this effect decreases by the increase in the board independence. Academic significance of the present research stems from the fact of elaboration of the methodology for the differentiation of the monitoring role of independent directors and the role in the mitigation of the wealth transfer from debt holders to majority shareholders; as well as the obtaining of empirical evidence from emerging markets using option-adjusted spread on a corporate bond as the proxy for the cost of debt, in which the term structure of the yield to maturity is taken into account.