Analysis On The Influencing Factors Of Debt Covenant’s Governance Effects

Since ownership of the company separated from management, there has been theprincipal-agent problem between the owners (shareholders) and the managers (management).Due tothe inconsistency of their interests and the asymmetry of the information they obtained, themanagement often harm the interests of shareholders and the company to maximize their ownprofits, then it results in the agency cost. In order to solve the principal-agent problem and reducethe agency cost, people put forward the theory of corporate governance. Traditional corporategovernance aims at maximizing shareholders’ benefits and reduces the agency cost through a set ofsystem design and arrangement. With the continuous development of corporate governance theory,people found that debt financing would make the corporation under the pressure of bankrupt andraise the shareholding ratio of the management. Then it resulted in the convergence ofmanagement’s interests and shareholders’ benefits, which led to the managers’ harder work and thedecrease of the agency cost. Finally the business performance had been improved as a result of it. Inthe meantime, debt financing would reduce the corporate’ s free cash flow, prohibit themanagement’s post-related consumption and non-efficiency investments, then further decrease theagency cost. Therefore, debt financing could reduce the agency cost, so as to improve the level ofcorporate governance and whole value. A large number of empirical studies abroad have verifiedthe theory. However, due to Chinese unique political, economic system and the imperfect capitalmarket, the theory has not been well verified in our country. After researches, many scholars foundthat the debt financing covenants of Chinese listed companies did not play a good role ingovernance. However, we still know little about what factors hinder the debt covenant’s governanceeffects and what factors benefit its governance effects.In order to explore the unknown and doubts of theoretical research, this article choosesChinese A-share listed corporation as the research sample, uses the multiple regression to explorethe corporate governance effects of the debt financing covenants. And there is an empirical test onthose factors: institutional environment factors, five aspects of internal corporate governance (thenature of ultimate controllers, the extent of ownership concentration, the independence anddiligence of the board, the board’s surveillance, and the incentive degree of managers), as well asthe internal control factors’influence on the debt governance effects.The empirical results show that:(1)China’s listed corporation debt financing contract did not improve the level of corporategovernance, the governance effect does not play a positive role, but have a negative impact on corporate governance.(2)The institutional environment can affect significantly the governance effect of debtfinancing in the play, the better institutional environment (i.e., a higher degree of marketization)area, the debt financing contract can play better corporate governance effect.(3)The factors of internal corporate governance will have a significant effect on thegovernance effects of debt financing. Specifically: first, the ultimate control of man-madegovernment companies, the governance effect of the debt financing contract suffered more seriousdistortions, this may be the government’s "fatherly effecs" and "soft budget constraint" caused;second, ownership concentration on the governance effect of debt financing has great influence,ownership concentration degree to improve debt contract governance effect; third, have a positiveeffect not remarkable directors diligence the governance effect of debt financing, while theindependent directors to perform their duties because of the restrictions, not on the debt financinggovernance effects play a better role; fourth, the positive effect of the board of supervisors is notbigger and more able to exert governance effect of debt financing, only to maintain a reasonablescale of board of supervisors to ensure its supervision function to obtain the best play; fifth,manager incentive will significantly affect the debt contract governance effect, incentive managersare more, play the debt contract governance effect.(4) The internal control is effective, debt contract governance effect can play better, but thispositive effect is not significant, this may be due to the overall level of control is our internal lowlisting corporation.According to the empirical results of this article, the author put forward policy suggestions onthree aspects: the government, commercial banks, and the corporation itself, in order to strengthenthe corporate governance effects of the debt financing covenant, and to improve the level ofcorporate governance, safeguard the interests of creditors, improve the ability to prevent and controlthe market risks of the company.