| Corporate governance has the function of mitigating agency cost, through which it has impacts on shareholders and bondholders. Using a data sample of S&P; 1500 companies over the period of 1996-2011, I study the relationship between corporate governance and credit ratings controlling for the state of the business cycle. I find that in addition to mitigating agency cost, corporate governance also has a second function to promote decision efficiency and bondholders' demand for this function varies along the states of business cycles. More specifically, when the economy is in a recession where risk levels are relatively higher, bondholders demand more from corporate governance to mitigate agency cost, while in booms, the demand is higher for decision efficiency. |
