Corporate governance, sustainability and the assessment of default risk

Abstract

This paper investigates whether the quality of a firm’s corporate governance practices and its sustainability 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 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”. It is similarly expected that the voluntary disclosure of sustainability information (Corporate Social Reporting or CSR) will enhance a firm’s management reputation. The assessment of default risk is captured by a firm’s individual credit rating supplied by Standard and Poor’s. Our results indicate that neither annual report disclosures about corporate governance practices nor sustainability disclosures are significantly related to assessed default risk when firm size is controlled.