Discussion Papers In Economics
And BusinessCorporate Governance and the Costs of Public Debt Financing:
Evidence from Japan

Takanori Tanaka
Discussion Paper 11-35

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANCorporate Governance and the Costs of Public Debt Financing:
Evidence from Japan

Takanori Tanaka
Discussion Paper 11-35
December 2011

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANCorporate Governance and the Costs of Public Debt Financing:
Evidence from Japan

Takanori Tanaka†

Abstract
This paper explores the relation between corporate governance mechanisms in Japan and thecosts of public debt financing. Using a sample of Japanese corporate bond issues during theperiod 2005-2008, we find that CEO ownership is associated with higher yield spreads after
controlling for firm- and bond-specific characteristics. Founding family ownership is also
positively related to yield spreads. In contrast, firms with large corporate shareholders enjoy
lower yield spreads. These results are robust to various alternative specifications. Overall, ourresults indicate that corporate governance mechanisms in Japan are important factors affecting
the costs of public debt financing.

JEL classification: G32, G34
Keywords: Yield spreads; Ownership structure; Corporate governanceThe author would like to thank Keiichi Hori, Kotaro Inoue, Katsuyuki Kubo, Kazuo Ogawa, Takafumi
Sasaki, Nobuyoshi Yamori, Kengo Yasui, participants at annual meetings of the Japanese Economic
Association and the Nippon Finance Association, and seminar participants at Nagoya University andRitsumeikan University for valuable comments and suggestions on an earlier version of this paper. This
work was financially supported by Grant-in-Aid for Research Activity Start-up from Japan Society for the
Promotion of Science. All remaining errors are the sole responsibility of the author.
†

Faculty of Economics, Ritsumeikan University, 1-1-1 Nojihigashi, Kusatsu, Shiga 525-8577, Japan.
E-mail: tktanaka@fc.ritsumei.ac.jp. Tel: ＋81-77-561-4645.

1. Introduction
Investors are generally concerned about whether they will certainly get some returns on theirinvestments. The main purpose of corporate governance systems is then to provide investors with anassurance that they will be distributed some profits as these returns (Shleifer and Vishny, 1997). Thus,
investors have a great interest in the type of corporate governance system in firms with which they
invest. For instance, if corporate governance systems that protect investor’s interests dominate, theninvestors is likely to obtain their returns, and these firms will enjoy lower costs of external financing.
In contrast, when corporate governance systems that generate the agency conflicts with investors
prevail, then the required returns on investments are not likely to materialize, and these firms will facehigher costs of external financing. Thus, the quality of the corporate governance system has asignificant effect on the ability of firms to raise external finance.
It is often argued that shareholder’s interests do not fully align with those of bondholders. For
example, shareholders could expropriate wealth from bondholders by investing in riskier projects, andthen reap most gains if the projects perform well, while bondholders bear most of the costs (the asset
substitution problem) (Jensen and Meckling, 1976). Such a divergence of interests between
shareholders and bondholders becomes severe when controlling shareholders have an incentive topursuit self-serving activities. Controlling shareholders then tend to entrench themselves at theexpense of other investors, and then enjoy the private benefits of control, thereby leading to a
reduction in firm value. Moreover, these activities include risk-taking and wealth transfer activities
that are detrimental to bondholder. Thus, these incentives could potentially exacerbate theshareholder-bondholder conflict and generate an increase in potential default risk. Recognizing theagency conflicts with controlling shareholders, bondholders will require higher yields for these firms.
However, controlling shareholders often bring benefits to bondholders. Controlling shareholders havean incentive to monitor, discipline, and even oust incumbent managers. These monitoring activities
serve to curb managerial discretion, and then enhance firm value. Consequently, monitoring activities
potentially mitigate the shareholder-bondholder conflict, and thus lower potential default risk.
Bondholders reflect such benefits in bond yields, and so permit the firms to enjoy lower yields.1
In this paper, we examine the relation between corporate governance mechanisms in Japan andthe costs of public debt financing. Using a sample of 640 corporate bond issues on 196 firms during
the period 2005-2008, our empirical analysis reveals that CEO ownership is positively associated withyield spreads after controlling for firm- and bond-specific characteristics. This suggests thatbondholders are concerned about conflict of interests with the CEO, and correspondingly require1

For an extensive survey on the role of controlling shareholders in agency conflicts within firms, see
Denis and McConnell (2003), and Shleifer and Vishny (1997).
-1-higher yields for the bond issues of these firms. In addition, we find that family ownership is
positively correlated with higher bond yields. This indicates that family firms face higher costs ofpublic debt financing because of concerns about the agency conflicts with family members. Finally,
firms with large corporate shareholders have lower yield spreads. This could be interpreted as
evidence that monitoring activities by large corporate shareholders enable the firms to enjoy lower
costs of public debt financing.
In addition, we present some other interesting results. First, we consider whether managerial
ownership affects the costs of public debt financing. Consistent with the results above, managerial
ownership is positively related to yield spreads, suggesting that managerial ownership is viewed
negatively in the bond markets. Second, we construct five family firm-related variables. In particular,when the firm founder serves as president or chairperson and family members are among the top ten
shareholders, these family firms face higher yield spreads. This indicates that the costs of public debt
financing vary with the type of family firm. Finally, a larger share of directors from large corporateshareholders is related to lower yield spreads. This shows that monitoring activities are consideredfavorably by bondholders.
To check the robustness of our results, we test various regressions models. Our main results arerobust to alternative specifications with respect to the type of security firms serving as bondunderwriters, inclusion of financial institution ownership, sample selection, nonlinearities in credit
rating and leverage, adjusted credit rating variable, and endogeneity concerns. Overall, our findings
show that corporate governance systems in Japan are essential factors influencing the costs of public
debt financing and then these impacts change with the characteristics of the corporate governancesystem.
This study is related to other works on the impacts of corporate governance systems on the costsof public debt financing. Anderson et al. (2003) examine the effect of family ownership on the costs ofpublic debt financing, and show that family ownership is associated with lower yield spreads. Bhojraj
and Sengupta (2003) document that institutional ownership has an adverse impact on yield spreads,
while a higher share of outside directors has a favorable effect on yield spreads. Cremers et al. (2007)
explore the relation between shareholder control as internal governance and takeover defenses asexternal governance, and provide evidence that the impact of shareholder control on yield spreads
varies with takeover vulnerability. In examination of the relation between corporate governance andthe costs of public debt financing, earlier studies also adopt the antitakeover provisions index
constructed by Gompers et al. (2003). Klock et al. (2005) provide evidence that antitakeoverprovisions lower the costs of public debt financing, and so conclude that antitakeover provisions are
viewed positively by bondholders. Chava et al. (2009) investigate the relation between the-2-antitakeover provisions index and the costs of bank loans. They find that firms with higher takeover
vulnerability are required to pay higher spreads on bank loans. However, these studies are limited tocorporate governance systems in the United States. We then require further investigations of thelinkages between ownership structures and the costs of public debt financing in other countries,
including Japan.
This paper makes two contributions to existing literatures. First, we provide first evidence that
corporate governance mechanisms in Japan have substantial impacts on the costs of public debt
financing. Japanese firms mainly use bank loans for raising funds, and analyses in previous studies arelargely limited to examination of the relation between corporate governance by banks and easy accessto banks loans (e.g., Hoshi et al., 1991).2 Moreover, of the works investigating the determinants ofyield spreads in Japanese corporate bond market, corporate governance structures that could affectyield spreads have been not explored (see, e.g., Nakashima and Saito, 2009; Takaoka and McKenzie,
2006; Shirasu and Yonezawa, 2008). Second, our results suggest that bondholders have different
concerns about governance mechanisms in Japan by focusing on governance structures that receive
less attention in previous literatures. For CEO ownership, earlier works ignore the linkage between
CEO ownership and the costs of public debt financing. For family-owned firms, the analysis of family
firms in Japan is primarily rare.3 For non-financial firms as shareholders, extant empirical literatures
mainly place emphasis on the relation between ownership level and firm performance (e.g., Miyajima
and Kuroki, 2007; Morck et al., 2000), and therefore focus less on the relation between ownershiplevel and the costs of public debt financing. In addition, previous papers consider the large institutional
shareholders that have no special relationship with firms other than ownership (Anderson et al., 2003;
Bhojraj and Sengupta, 2003; Cremers et al., 2007). In contrast, Japanese non-financial firms as large
shareholders maintain long-term relationship with firms apart from ownership.
The rest of the paper is organized as follows. Section 2 provides explanations withcharacteristics of our data sample, the construction of the variables, and descriptive statistics. Section
3 provides the basic results, and Section 4 shows some additional results. Section 5 tests the robustnessof our results. Section 6 concludes the paper.

2. Data, variables, and descriptive statistics
In our analyses, we use a sample of at-issue straight bond issues during the period 2005-2008,2

The agency problems between shareholders and debtholders in Japan are explored in Prowse (1990) that
documents that concentrated ownership by Japanese financial institutions as debtholders helps mitigate theagency problems.
3
The extant literatures on family firms in Japan include Nguyen (2011) and Saito (2008).
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published by the Japan Securities Dealers Association. This dataset, among other things, includes
information about bond yields, amounts, maturities, and ratings. The bond issue data is merged withinformation on corporate governance measures, and financial information. Our sample is restricted tobond issues with fixed rate. We exclude from the sample firms in the finance industry, and regulatedindustries such as electric and gas. In particular, our sample does not include the data for Japan
Railway Group, and Japan Tobacco Inc. because these firms were managed previously by thegovernment, and even now continue to maintain close relationship with the government. We also
remove unlisted firms and investment trusts because financial information is not available. Aftermerging the datasets and excluding unnecessary observations, the resulting sample covers 640
firm-year observations on 196 firms.

2.1. Yield spreads
Our dependent variable, Spread, is calculated as the at-issue yield to maturity on straight bonds
in excess of the yield to maturity on government bonds with the closest maturity as a benchmark.
Information on government bonds come from the Japan Securities Dealers Association.

2.2. Corporate governance variables
For governance measures, we use three key corporate governance variables: CEO ownership,
family ownership, and corporate ownership. These corporate governance variables are calculated at
the fiscal year-end prior to the bond issue.

2.2.1. CEO ownershipAs suggested by Berle and Means (1932), when managers have little equity in the firms, andshareholders are widely dispersed, managers have less incentive to pursue value-maximization
objectives. Instead, they tend to adopt investment and financing policies that benefit themselves at theexpense of shareholders. Self-serving activities include opportunistic behavior, job protection, and theallocation of investor’s funds for personal benefits as non-value-maximizing activities. In such asituation, the manager’s interests are not coincident with those of the firm’s shareholders.
However,whenmanagerial

ownershiprises,

manager’s

incentive

topursuenon-value-maximizing objectives declines because managers with equity need to incur costs
associated with self-serving activities. In its place, managers have an incentive to enhance the market-4-value of the firm. As such, alignment of the manager’s interests with those of shareholders results in a
reduction in the potential divergence of interests between managers and shareholders (Morck et al.,1988).4 Furthermore, the reduction in managerial discretion benefits bondholders because manager’s
self-interested activities that harm bondholders decline. As a consequence, interests of managers as
shareholders become closer to those of bondholders, and the likelihood of default risk is lower. Overall,
if bondholders perceive managerial ownership as lowering the likelihood of default, they allow thesefirms to issue debt with lower yields.
However, there are costs associated with higher managerial ownership because higher
ownership provides managers with an incentive to entrench themselves against other corporate
governance mechanisms. Entrenched managers could then again indulge their preferences for
non-value-maximizing objectives (Morck et al., 1988). Moreover, self-serving activities harm
bondholders. In such a situation, the bondholder-shareholder conflict is exacerbated, and default risk
potentially increases. If bondholders predict such managerial incentives, they demand higher returns
from these firms.
We examine the impact of ownership held by managers on the costs of public debt financing byusing the variable for the fraction of equity held by the CEO (CEO ownership). CEOs are generally
powerful figures on board, and have the ability to exercise great power over management decisions.
Thus, if CEO ownership is considered positively in the bond markets, the coefficient on CEO
ownership is expected to be negative. On the other hand, if CEO ownership is considered unfavorably
in the bond markets, the coefficient on CEO ownership is expected to be positive. Because there is no
theoretically strong a priori reason to favor one effect over the other, the effect of CEO ownership onyield spreads is an empirical issue. We often face the difficulty in identifying the CEO on board. For
many of our sample firms, either the chairperson (Kaicho) or president (Shacho) is typically the CEO.
However, in other firms, we sometimes obtain no clear information about CEO, and so we assume thatthe president (Shacho) on the board is the CEO.5 Identification of CEO on board and data onownership level held by CEO come from the Yakuin Shikiho published by Toyo Keizai Shinposha andthe Yuka Shoken Houkokusho.
In addition to CEO ownership, we use the fraction of equity held by the managers (Managerial
ownership). While CEO ownership captures the effect of CEO incentive on yields, Managerial
4

Some studies argue that alignment of manager’s interests with shareholder’s those could harm
bondholders by encouraging managers to invest in riskier activities (Bagnani et al., 1994; Ortiz-Molina,2006). However, because bondholders receive benefits from the decrease in managerial discretion, thesealignment effects do not always have an adverse impact on bondholders.
5
Chairperson often exerts powerful influence on firm management. For this reason, Kubo and Saito (2009),
and Saito (2008) use information about the sum of equity held by both president and chairperson. However,
we are unable to do this because our sample includes firms with committee systems that have nochairperson in an executive position.
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ownership are included to control for the effects of all manager’s incentives.

2.2.2. Family ownershipFounding family firms are prevalent among public firms around the world.6 Unlike othershareholders, families have an unique incentive to manage their firms. In particular, they have aninterest in both the firm’s long-term survival, and their family’s own reputation. These could
potentially affect the shareholder-bondholder conflict. First, families have a strong impetus to keep thefirm survive, and to pass the firm to other family members or their descendants. Thus, families seek tomanage the firm for survival by maximizing firm value rather than shareholder value. Because
bondholders benefit from higher firm value, this incentive unique to family firms could help mitigate
the shareholder-bondholder conflict. Second, families are concerned about their family’s reputation
held by external parties. Family firms generally experience infrequent turnover of managers anddirectors. This long-term board presence keeps relationship with external parties sustainable. More
importantly, long-term relationship established through family reputation is also desirable forbondholders because families continue to maintain firm performance in the long run (Anderson et al.,2003).7
As discussed earlier, when families are major shareholders, they have an incentive to monitor
and discipline management, thereby enhancing firm performance. These monitoring activities benefit
bondholders, and so help mitigate the shareholder-bondholder conflict, thereby resulting in lower
default risk. Taken together, if family-owned firms are viewed as lowering default risk in the bondmarkets, family-owned firms enjoy lower costs of public debt financing (Anderson et al., 2003).
However, family firms could also extract the private benefits of control at the expense of otherinvestors, including bondholders. This could aggravate the shareholder-bondholder conflict, thereby
leading to an increase in default risk. When family-owned firms are viewed as raising default risk by
bondholders, they have higher costs of public debt financing.
Unfortunately, we have no comprehensive data source on family firms, and face the difficulty inobtaining reliable data on these firms. Accordingly, we attempt to gather manually information on
family firms from several data sources. First, we identify the firm founder, using the Nihon Kaishashi
Souran published by Toyo Keizai Shinposha, and the Yuka Shoken Houkokusho. If we are unable toidentify the firm founder, we consider the firms as those without founders, e.g., firms founded by otherfirms. Second, we obtain information on the founder’s descendants, including distant relatives orin-laws with different last names using the Nikkei Telecom 21 and the Yuka Shoken Houkokusho.
6
7

Saito (2008) documents that family firms are relatively common in Japan.
For a more detailed discussion, see Anderson et al. (2003).
-6-

Finally, we seek to collect information about equity ownership related to family members.
Family-member related ownership includes not only equity held directly by family members, but
family member-related holding companies or foundations.
We attempt to obtain information on family member-related ownership, but have the difficultyin accurately collecting the data. Following Anderson et al. (2003), we construct a ownership-based
binary variable (Family ownership) that has a value of 1 if family members, and the affiliated firms areamong the top ten shareholders, and 0 otherwise (50 firm-year observations on 28 firms). Thisdefinition differs from that in Saito (2008) in that in identifying family firms, we do not use
information about the family members on board. If family firms enjoy lower yields, the coefficient on
Family ownership is expected to be negative. In contrast, if family firms face higher yields, thecoefficient on Family ownership is expected to be positive. However, we have no a priori reasoning tounderpin the exact effect of ownership held by family members on yield spreads. Ultimately, thequestion of the effect of family ownership on yield spreads is an empirical issue.
In addition, existing studies document that the characteristics of the CEO, management, andownership in family firms have different effects on firm performance (Anderson and Reeb, 2003;
Mork et al., 1988; Saito, 2008; Villalonga and Amit, 2006), and the costs of public debt financing(Anderson et al., 2003). To capture these impacts, we use five dummy variables for family firms:
Founder ownership is a variable that takes a value of 1 if the firm founder serves as president orchairperson, and family members are among the top ten shareholders, and 0 otherwise (26 firm-year
observations on 13 firms). Founder management is a variable that takes a value of 1 if the firm
founder serves as president or chairperson, and family members are not among the top ten
shareholders, and 0 otherwise (3 firm-year observations on 1 firms). Descendant ownership is avariable that takes a value of 1 if the founder’s descendants serve as president or chairperson, andfamily members are among the top ten shareholders, and 0 otherwise (15 firm-year observations on 10
firms). Descendant management is a variable that takes a value of 1 if the founder’s descendants serve
as president or chairperson, and family members are not among the top ten shareholders, and 0
otherwise (18 firm-year observations on 9 firms). Outsider management is a variable that takes a valueof 1 if outsider hired by family members serves as president or chairperson, and family members are
not among the top ten shareholders, and 0 otherwise (9 firm-year observations on 6 firms). The exact
effects of these five dummy variables on yield spreads are also empirical issues.

2.2.3. Corporate ownership

Large shareholders have an incentive to gather information about the firms they partly own, and-7-

so monitor the incumbent mangers of these firms. Furthermore, they exert control over firmmanagement to have their interests respected. These monitoring activities decrease managerial
discretion. This suggests that the interests of outside shareholders are closely aligned with those of
bondholders that suffer from managerial discretion. Consequently, this alignment could help mitigate
bondholder-shareholder divergence, and lower default risk. Furthermore, large shareholders thattypically invest in the firms over longer periods have an incentive to alleviate the potential agency
conflicts with bondholders to repeatedly access the funds in the debt markets (Anderson et al., 2003).
Anticipating the benefits from such activities, bondholders require lower yields for the firm’s debt
(Bhojraj and Sengupta, 2003; Denis and McConnell, 2003). Conversely, outside large shareholders
could also exercise undue influence over management to enjoy the private benefits of control (see, e.g.,
Shleifer and Vishny, 1997). Such incentives could exacerbate the shareholder-bondholder conflict,thereby leading to an increase in potential default risk. Recognizing this, bondholders require higher
yields for the firms in which such controlling shareholders dominate.
We focus on non-financial firms among the firm’s outside shareholders. In Japan, non-financial
firms as the largest shareholders have a long-term relationship with the owned firms through repeatedbusiness transactions. In turn, vertical business linkages between subcontracting and parent firms often
characterize the relationship between owned firms and corporate sharehoders. We define corporateshareholders as those with more than 10 % shareholdings, and use the proportion of equity held bycorporate shareholders (Corporate ownership) to capture the effect of ownership level by corporateshareholders on the costs of public debt financing. Furthermore, when firm performances declines,
corporate shareholders could put pressure on management, and even replace incumbent managers byappointing their employees as new directors to the board. Thus, the presence of directors from
corporate shareholders on the board indicates that corporate shareholders intervene in the managementof owned firms, and discipline incumbent managers.8 In contrast, corporate directors could have an
incentive to enjoy the private benefits of control that often harm bondholders. As a result, corporate
directors are also likely to bring benefits or costs to bondholders. To address this, we also use
Corporate director that is defined as the fraction of directors previously appointed by corporateshareholders as director members to the board. If activities by corporate shareholder are beneficial forbondholders, the coefficients on both Corporate ownership and Corporate director are expected to be
negative. In contrast, if activities by corporate shareholder are costly for bondholders, the coefficientson both Corporate ownership and Corporate director are expected to be positive. Yet again, it is notpossible to predict a priori which effect will dominate, and thus the effect of corporate shareholders onyield spreads is an empirical question. Data on corporate ownership are obtained from the Japan

8

See, e.g., Kaplan and Minton (1994).
-8-

Company Handbook, and identification of directors previously appointed by corporate shareholders
comes from the Yakuin Shikiho.

2.3. Control variables
In examining the relation between corporate governance mechanisms and the costs of public
debt financing, we use three variable categories as control variables: governance-related variables,
bond characteristics, and firm characteristics.

2.3.1. Governance-related variables

In addition to our main three corporate governance variables, we use the years of CEO tenure,
the fraction of outside directors on the board, the size of board as control variables. These help control
for other governance characteristics that could potentially affect the costs of public debt financing.
CEO tenure length is associated with managerial opportunism by the CEO because the CEO’s control
over management increases with the length of CEO tenure. In addition, the CEO could become more
entrenched despite a relatively lower level of ownership by virtue of tenure length. CEO tenure is thevariable that takes a value of 1 if the tenure length is more than ten years, and 0 otherwise.
Outside directors also play an important role in monitoring managers, and then curbing theirself-interested activities. Moreover, outside directors have the ability to oversee the financial
accounting process, and as a result financial statement fraud is less prevalent in firms with outside
directors (Anderson et al., 2004). Thus, these firms with such directors could enjoy lower costs ofpublic debt financing. This is measured by the proportion of outside directors on the board (Outside
director).9
The number of board members could be related to the effectiveness of corporate governancebecause board size plays an essential role in monitoring and controlling managers. A smaller board
could make decisions more quickly, and this effectively decrease any agency problems among boards.
Indeed, Yermack (1996) finds negative relation between firm value and board size. On the other hand,a larger board also has some benefits in that the allocation of workload is across a great number of
directors that in turn could commit greater efforts in overseeing management. As a result, monitoring
activities become more frequent in larger boards (Anderson et al., 2004). This is measured as thenumber of the directors on the board (Board size). Identification of members of director boards comes

9

In the calculation of board members, we do not include audit committee members.
-9-

from the Yakuin Shikiho.10 All of these corporate governance-related variables correspond to the fiscal
year-end preceding the bond issue.

2.3.2. Bond characteristics

To control for other factors that could potentially affect the costs of public debt financing, we
also need to include variables for the bond characteristics. Our equations include the variables foramount, maturity period, time of issue, and credit rating. An increase in leverage makes the bondriskier, which results in higher yield spreads. Amount (Amount) is measured by the natural logarithmof issue size (in billions of yen). Bond issues with longer maturities have higher risk andcorrespondingly have higher default risk. This leads to higher yield spreads. Maturity period(Maturity) is measured by the number of years to maturity. Firms with extensive experience inaccessing the debt market are familiar with bondholders, and these firms could correspondingly enjoy
lower yield spreads. This is measured as the natural logarithm of the number of times the firm has
previously issued bonds (Times).
In our sample of bond issues, each issue has credit ratings assigned by at least one of the four
credit rating agencies: Standard & Poor’s (S&P), Moody’s, Japan Credit Rating Agency (JCR), andRating & Investment Information (R&I). Problematically, bond issues usually have multiple credit
ratings. To address this, we convert the credit rating into a numerical index, and calculate an average
credit ratings score (Anderson et al., 2003; Klock et al., 2005; Ortiz-Molina, 2006). Table 1 presents
the conversion numbers for S&P, Moody’s, JCR, and R&I firm bond ratings. For example, a firm with
an A－ rating from S&P and an A＋ rating from R&I are assigned to an average score of 14.
However, credit rating agencies are concerned about governance structure in evaluating the firm’s
creditworthiness. The effect of corporate governance on default risk could be generally reflected on
credit ratings. Indeed, previous papers find significant relation between corporate governance andcredit rating (Ashbaugh-Skaife et al., 2006; Bhojraj and Sengupta, 2003). Accordingly, we regress anaverage credit rating score on our corporate governance variables, and then compute the residual fromthe regression. This residual thus contains information about creditworthiness excluding the effects ofthe corporate governance mechanisms on credit ratings. We use this residual as the variable for credit
rating (Credit rating). Higher credit rating score generates lower yield spreads.

2.3.3. Firm characteristics
10

After the asset price bubbles in the early 1990s in Japan, board meetings in Japanese firms drasticallychanged. The focus of the reform is on outside directors and board member size (Nitta, 2008). Thus,
controlling for different board characteristics resulting from board reform is important for our analyses.
- 10 -

To control for firm characteristics, we use the variables for profitability, immediate financial
distress, leverage, growth opportunities, size, age, and dividend policy. Less profitable firms tend tohave difficulty in repaying debt. These firms typically experience higher costs of public debt financing.
Firm’s profitability (ROA) is defined as the ratio of pretax income to total assets. Lower working
capital indicates that the firms are under intermediate financial stress. Such firms face higher costs ofpublic debt financing. More importantly, corporate shareholders continue to maintain long-term
relationship with owned firms through repeated business transactions. By controlling trade payables toowned firms or trade receivables from owned firms, corporate shareholders could help bail out thepoorly performing owned firms. Thus, inclusion of working capital in our equation helps capture theseeffects on the costs of public debt financing. This is measured by the current assets minus current
liabilities, divided by total assets (Working capital). Firms with larger leverage increase the probabilityof bankruptcy, thereby facing higher costs of public debt financing. Firm’s leverage (Leverage) isdefined as the long-term debt, including long-term loans and bonds (straight, convertible, and warrant
bonds), divided by total assets. Firms with higher growth opportunities could be also subject to greaterrisk, and then have higher costs of public debt financing. We define growth opportunities(Market-to-book ratio) as the sum of the market value of equity plus the book value of total debt,
divided by the book value of total assets. Larger firms generally enjoy the economies of scale, andstable performance. Thus, larger firms could enjoy lower costs of public debt financing. As firm’s size
is not expected to be linearly associated with the costs of public debt financing, this is measured as thenatural logarithm of total assets (Firm size) (in millions of yen). Older firms survive competitively inthe market over longer periods, and thereby establish a reputation as creditworthy firms. Thus, older
firms could have lower costs of public debt financing. Specifically, among family firms, firms inwhich the firm founder is on the board or is a major shareholder are younger. This shows thatcharacteristics of family firms are closely related to firm’s age. Thus, inclusion of the variable forfirm’s age in our specification is important in examining our predictions. We also expect thechronological firm age to nonlinearly affect the costs of public debt financing, and so this is measured
by the natural logarithm of years elapsed since establishment (Firm age) (in years). Finally,
bondholders are concerned about wealth transfer from bondholders to shareholders through dividend
payments. If firm’s dividend policy is viewed as a form of wealth transfer by bondholders, dividend
policy generates higher costs of public debt financing. In contrast, firm’s dividend policy could be asignal that the firm has substantial internal funds, and thus has lower default risk. If firm’s dividend
policy is viewed favorably by bondholders, such a policy is negatively associated with the costs ofpublic debt financing. To control for these effects, we use Dividend that is defined as total dividends,- 11 -

divided by total sales. All of these firm-specific variables are measured at the fiscal year-end preceding
the bond issue. Data on financial statement used for the calculation of these variables come from the
Nikkei Needs dataset, which provides information on balance sheet and financial statement for thefirms listed on the stock exchange.

2.4. Descriptive statistics
Table 2 provides descriptive statistics for the bond characteristics, corporate governancemeasures, and firm characteristics. The descriptive statistics include the means, medians, standard
deviations, maximums, and minimums for the variables used in the basic analysis. Spread has a meanof 44.370 basis points, with a standard deviation of 32.411.11 CEO ownership has a mean value of0.007, with a standard deviation of 0.041. Family-owned firms comprise only about 8% of our sample.
This suggests that family firms mainly use other methods for raising funds. Corporate ownership has amean value of 0.054, a standard deviation of 0.136, a maximum value of 0.672, and minimum value of0, respectively. The mean value of Maturity is 6.257 years, with a standard deviation of 2.501 years.
Credit rating has a mean value of 13.888, with a standard deviation of 1.965.12 The mean value of
ROA is 0.022, with a standard deviation of 0.179. Firm size, the natural log of total assets, has a meanvalue of ¥14.066 million, a standard deviation of ¥1.152 million, a maximum value of ¥17.295 million,
and minimum value of ¥10.561 million, respectively.
Table 3 shows the distribution of the 640 firm-year observations on the 196 firms during theperiod 2005-2008. Panel A presents the distribution of the sample by fiscal year, while Panel B
provides the industry distribution. The industry classifications come from the Japan Company
Handbook.
Table 4 reports the correlations between Spread, and the corporate governance variables,
including CEO ownership, Family ownership, Corporate ownership, CEO tenure, Outside director,
and Board size. Spread is positively correlated with CEO ownership, and Family ownership. This isconsistent with the notion that bondholders are concerned about the agency conflicts with the CEO orfamily members that could enjoy the private benefits of control. Conversely, we find no significant
relation between Spread and Corporate ownership. However, we do not control for other factors that
could potentially affect Spread. To better explore the relation between Spread and Corporate
11

In the subsequent empirical analysis, the yield spreads used are the raw values, not in basis points.
For the credit rating variable in Table 2, we use the residual from regressions of an average credit ratingscore on CEO ownership, family ownership, corporate ownership, outside director, and board size. CEOtenure is not used as an independent variable in the regression because it is highly correlated with CEO
ownership, and so the effect of CEO tenure on credit rating is likely to be captured in CEO ownership. In
the subsequent analysis, we use different corporate governance variables across different specifications, andcorrespondingly we reestimate a credit rating variable for each specification.
- 12 12ownership, we need to use multivariate regression frameworks.

3. Results
In this section, we use multivariate frameworks to explore the relation between governancemechanisms and the costs of public debt financing. To draw meaningful inferences, we control for othergovernance-related factors, bond characteristics, and firm characteristics that could potentially affect thecosts of public debt financing. We also include industry- and year-specific variables to control for any

possible industry and year effects. Table 5 presents the results for the impacts of corporate governancemeasures on the costs of public debt financing during the period 2005-2008. The coefficients are
estimated using ordinary least squares (OLS) regression method. Standard errors reported inparentheses are robust to heteroskedasticity and adjusted for the clustering of multiple observations forthe same firm.13
Column 1 in Table 5 contains regression estimates for the specification with CEO ownership.
The estimated coefficient on CEO ownership is statistically significant and positive. This suggests thatfirms in which the CEO dominates have higher costs of public debt financing, consistent with thenotion that bondholders

demand higher yields from the firms with higher CEO ownership because of

the concerns about the potential default risk arising from potential conflict of interests.
Column 2 contains the results for the specification including Family ownership. The estimatedcoefficient on Family ownership is statistically significant and positive, suggesting that family firms
experience higher costs of public debt financing. This is in line with the view that bondholders require
higher yields from the firms in which conflict of interests between family members and bondholders
potentially arises. This result runs contrary to the finding that firms with family ownership enjoy lower
costs of public debt financing in the United States (Anderson et al., 2003). The contrasting results
show that bondholders have different views about family-owned firms in different countries.
Column 3 is based on the specification with Corporate ownership. The estimated coefficient on
Corporate ownership is statistically significant and negative, suggesting that the costs of public debt
financing are lower in firms with large corporate shareholders. This concurs with the notion thatmonitoring activities by large corporate shareholders serve as an effective mechanism for better
protecting the interests of bondholders.14
Column 4 considers the basic specification in which we simultaneously consider all three

13

For the clustering technique, see, e.g., Wooldridge (2002).
Negative relation between corporate ownership and spread could interpreted as suggesting that parent
firms as large shareholders explicitly or implicitly guarantee the credit for their subsidiaries or affiliatedfirms, and that such a credit guarantee is viewed favorably in the bond markets.
- 13 14

corporate governance variables. In line with our results in columns 1-3, the estimated coefficient on
CEO ownership is statistically significant and positive, and the estimated coefficient on Family
ownership is statistically significant and positive. The estimated coefficient on Corporate ownership is
also statistically significant and negative.
In terms of control variables, the estimated coefficient on CEO tenure is not statisticallysignificant in two regressions because the effect of CEO tenure on Spread could be captured in CEO
ownership. As Table 4 reports, the correlation coefficient between CEO tenure and CEO ownership is0.482. The estimated coefficients on Outside director and Board size are not statistically significant.
This could be because of collinearity among the governance variables. Amount has an estimatedcoefficient that is positive and statistically significant. This suggests that larger amounts of debt havehigher default risk, resulting in higher costs of public debt financing. The estimated coefficient on
Maturity is statistically significant and positive, suggesting that bonds with longer maturities havehigher costs of public debt financing because of greater default risk. Times has a coefficient that isnegative and statistically significant in two of the four regressions, indicating that firms that issue
bonds frequently are viewed favorablely in the bond markets. The negative and statistically significant
estimated coefficient on Credit rating indicates that a decrease in default risk lowers the costs ofpublic debt financing. The estimated coefficient on ROA is statistically significant and negative,
indicating that firms with better performance are viewed positively by bondholders. The significant
negative estimated coefficient on Working capital indicates that firms under immediate financial stressface higher costs of public debt financing. The statistically significant and positive coefficient on
Leverage indicates that firms with higher debt levels face higher costs of public debt financing
because of higher default risk. Market-to-book ratio has no statistically significant coefficients in all
four specifications, possibly because the effects are likely to be captured in Credit rating. Statisticallysignificant and negative coefficients on Firm size and Firm age indicate that larger and older firms
enjoy lower costs of public debt financing. Dividend has a negative and statistically significant
coefficient. This could be interpreted as evidence that bondholders consider dividend policy as a signalthat firms have rich source of internal funds.
In Table 5, we explore the relation between corporate governance mechanisms and the costs ofpublic debt financing. Our findings reveal that all three governance variables are significantly
associated with yield spreads. We thus conclude that these governance measures have influential
impacts on the costs of public debt financing, and that these impacts vary across alternative corporate
governance systems.

4. Additional results- 14 -

In this section, we present additional results for the relation between corporate governance andthe costs of public debt financing. First, to capture managerial incentives, Managerial ownership isincluded in our specification. Column 1 of Table 6 reports the results for the specification withManagerial ownership.15 Like CEO ownership, the estimated coefficient on Managerial ownership is
statistically significant and positive. This suggests that firms with higher managerial ownership facehigher costs of public debt financing, and corresponds with the view that bondholders are concerned
about potential agency conflicts, and thus require higher yields when financing such firms. It is well
documented that a nonlinear relation between managerial ownership and firm performance exists (seee.g., Morck et al., 1988). To capture this effect, we estimate the regression with a squared term ofManagerial ownership as an additional variable. In unreported results, both the linear and squared
terms of Managerial ownership have no significant coefficients. This could be attributed tomulticollinearity between the linear and squared terms.16
Next, family firm characteristics could have different impacts on the costs of public debt
financing. To capture the effects of family firm characteristics on the costs of public debt financing, we
use five family firm-related variables: Founder ownership, Founder management, Descendantownership, Descendant management, and Outsider management. In unreported results, we find no
significant relation between five family-related variables and yield spreads. This could be attributable
to higher correlation of CEO ownership with Founder ownership. Indeed, the correlation coefficient
between CEO ownership and Founder ownership is 0.766. Then, we examine the effects of thesefamily firm-related variables on yield spreads by removing CEO ownership from our specification.
Column 2 presents the results for the specification with five family firm-related variables. The
estimated coefficient on Founder ownership is statistically significant and negative. This indicates thatfamily firms in which the firm founder occupies a top management position, and family members aremajor shareholders face higher costs of public debt financing, suggesting that such family firms havemore incentive to entrench themselves at the expense of bondholders. However, the remaining family
firm-related variables have no significant coefficients, possible because of the smaller observations forthese variables.
Third, we focus attention on the directors previously appointed by corporate shareholders to theboard. As we argued earlier, when corporate shareholders have an incentive to intervene in the
management of owned firms, they tend to dispatch their employees as directors on the firm’s board.
15

Bagnani et al. (1994) explore the linkage between managerial ownership and the return premia on
corporate bonds.
16
Hiraki et al. (1998) find no nonlinear relation between managerial ownership and firm performance.
However, unlike our findings, they document that managerial ownership is positively related to firm value
over their sample period, ranging from the late 1980s to the late 1990s.
- 15 -

These appointed directors then help discipline managers to have their interests respected. Thus, thepresence of corporate directors on board is a direct indicator that the involvement of corporateshareholders in management increases. Our variable, Corporate director, helps capture the impacts ofcorporate directors on the costs of public debt financing. Column 3 provides the results with
Corporate director. The estimated coefficient on Corporate director is statistically significant andnegative, suggesting that firms with directors from large corporate shareholders experience lower costsof public debt financing. This aligns the view that directors appointed by large corporate shareholders
to the board discipline the incumbent managers, thereby reducing the agency conflicts withbondholders.
Table 6 reports additional regression results for the relation between corporate governancemechanisms and the costs of public debt financing. We provide evidence that managerial ownership,
family-firm related variables, and corporate director have essential impacts on the costs of public debt
financing.

5. Robustness checks
Earlier sections present evidence that corporate governance mechanism in Japan exercises
significant influence over the costs of public debt financing. In this section, we test whether our results
are robust to various alternative specifications. Table 7 provides the regression estimates as robustness
checks of our results. We only present the robustness tests of our results for the basic regression in
Table 5, but our robustness checks also hold for the three specifications in Table 6.

5.1 Security firms as underwriters
Existing works extensively explore the role of commercial banks in underwriting securities,
especially via bank subsidiary security firms. 17 These papers propose two opposing views: thecertification view and the conflict-of-interest view. According to the certification view, close
relationships with banks brings benefits to client firms that issue bonds because commercial banks
have an advantage over security firms in gathering firm’s private information unavailable to othersecurity firms and investors through loan contracts and other financial services. When bank-owned
security firms underwrite the securities of firms that establish close relationship with banks, banksthen have the ability to provide greater certification to the value of the issue. Investors reflect thiscertification by banks in bond yields, and demand lower yields on the issues underwritten by bank17

For empirical analyses on the role of Japanese banks in bond underwriting, see Hamao and Hoshi (2000),
Kang and Liu (2007), and Konishi (2002).
- 16 -

subsidiary security firms. Thus, we expect issues underwritten by bank subsidiary security firms tohave lower yields than those underwritten by other security firms. In contrast, in the view of theconflict-of-interest, strong bank-firm relationship develops conflict of interests between banks andinvestors. Banks could exercise significant influence over their client firms, and so often require client
firms to issue bonds to repay bank loans. In particular, such bank incentives become stronger when theclient firms are under financial distress. In this situation, bank-owned security firms underwrite bonds
issued by poorly performing firms, and entice potential investors by lowering the prices of these bonds.
This indicates that default risk is transferred from banks to investors, thereby resulting in thedivergence of interests between banks and investors. When investors forecast this incentive, theyreflect the wealth transfer in bond yields, and demand higher yields on the issues underwritten bybank-owned security firms. In summary, we predict that issues underwritten by bank-owned security
firms have higher yields than those underwritten by other security firms. Overall, the effect of thebank-firm relationship on bond yields is an empirical question. In our analysis, if bank-owned security
firms are among the lead managers of underwriters, we denote the issue as underwritten bybank-owned security firms. We then construct a dummy variable (Bank underwriting) that takes avalue of 1 if the issue is classified as underwritten by bank-owned security firm, and 0 otherwise. Of
the 640 bond issues in our sample, there are 234 issues on 111 firms underwritten by bank-owned
security firms. Column 1 provides the regression estimates including Bank underwriting. Consistent
with the findings in Hamao and Hoshi (2000), the estimated coefficient on Bank underwriting is
negative, but not statistically significant. However, our results concerning corporate governancevariables remain significant, even after controlling for the difference between underwriters.

5.2 Financial institution ownership
The bank-firm relationship is also closely associated with the firm’s public debt financing. Dattaet al. (1999) show that the bank-firm relationship (as measured by the presence of bank loans as acertification of creditworthiness) significantly lowers the at-issue yield spread for new public debt.18
Along with bank debt, equity ownership by banks then also plays a role in establishing the bank-firm
relationship in Japan. Accordingly, we use the proportion of equity held by financial institutions(Financial institution ownership) to control for this relationship. If this variable helps capture theeffect of the bank-firm relationship, firms with ties to financial institutions as shareholders have lower
yield spreads. On the other hand, earlier works document that financial institutions as shareholders
18

The variable, leverage, includes long-term loans from financial institutions, mainly banks. Given that
long-term loans are closely associated with bank-firm relationship, we already control for the effect ofbank-firm relationship through bank debt on yield spreads.
- 17 -

could play less role in corporate governance (see, e.g., Miyajima and Kuroki, 2007). If this is the case,bondholders will require higher yields for firms with such ineffective governance systems. In column
2, we present the results for the specification with Financial institution ownership. The estimatedcoefficient on Financial institution ownership is negative, but not statistically significant. However,inclusion of Financial institution ownership does not affect our basic results for the relation between
our corporate governance variables and yield spreads.

5.3 Sample selection
Our results are susceptible to sample selection concerns because our sample is restricted to firmsthat issued only straight bonds to raise funds during the sample period. The results from thisnonrandomly selected sample could then face a self-selection problem that biases the estimatedcoefficients. To correct for any possible bias, we reestimate the regression coefficients, using
Heckman’s two-step approach (Heckman, 1979). In the first-stage probit regression, we analyse debt
issue choice using an additional sample of 1532 publicly-traded firms, with fiscal years ending inMarch, that did not issue straight bonds at least during the sample period. The independent variables in
the regression includes ROA, financial institution ownership, working capital, cash holding (the ratioof cash and short securities to total assets), leverage, market-to book ratio, firm size, and firm age. In
the second-stage, the inverse Mills ratio estimated from the probit regression is included in our
specification, and we estimate the equation using OLS regression. Column 3 report the regression
results with the inverse Mills ratio as the sample selection adjustment term. The estimated coefficienton Inverse Mills ratio is positive, but not statistically significant. Thus, our results remain stable, evenafter controlling for the sample selection term.

5.4 Nonlinearities in credit rating and leverage
We estimate regression models allowing for the nonlinear effects of Leverage and Credit ratingon Spread. Column 4 of Table 7 shows the results with the specification including the squared term of
Leverage (𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 2 ) (Anderson et al., 2003; Klock et al., 2005). The estimated coefficient on
Leverage is negative, but not statistically significant, while 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 2 have a statistically significant
and positive coefficient. Adding the squared term of Leverage to the equation does not affect our
results. Column 5 contains the results for the specification with the squared term of Credit rating(𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑎𝑡𝑖𝑛𝑔2 ) (Anderson et al., 2003; Klock et al., 2005; Ortiz-Molina, 2006). The estimatedcoefficient on Credit rating is statistically significant and negative, and the estimated coefficient on- 18 -

𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑎𝑡𝑖𝑛𝑔2 is statistically significant and positive. This indicates that credit rating scores are
nonlinearly associated with yield spreads. For corporate governance variables, this regression also
yields similar results to those in Table 5. Taken together, our results are robust to alternative
specifications with respect to nonlinearities in Leverage and Credit rating.

5.5 Adjusting credit rating score
In Table 1, we assign the same conversion numbers to each credit rating level from the four
credit rating agencies. However, it is well known that Japanese firms typically receive lower credit
ratings from foreign credit rating agencies (S&P and Moody’s) than from domestic credit rating
agencies (JCR and R&I). Indeed, we find that for 104 issues on 23 firms with credit ratings from bothforeign and domestic agencies in our sample, an average credit rating score by foreign agencies islower than by domestic agencies, and the differences are statistically significant. To adjust for thisdifference, when we add a value of 1.5 to each conversion number of foreign agencies in Table 1, thedifference between average credit rating scores by foreign agencies and domestic agencies is notstatistically significant.19 Using the adjusted conversion numbers applied to all credit ratings fromforeign agencies, we estimate the variable for adjusted credit rating (Adjusted credit rating). Column 6reports the regression estimates for the specification with Adjusted credit rating. Adjusted credit rating
has a coefficient that is negative and statistically significant. Nevertheless, for our corporate
governance variables, this specification yields similar results to those in Table 5.

5.6 Endogeneity concerns
One concern about our results is that the relation between corporate governance variables andyield spreads is subject to potential endogeneity problems. Thus, we need to check whether our
corporate governance variables are endogenous. In the test for endogeneity (Wooldridge’s
regression-based test), we cannot reject the null hypothesis that all the corporate governance variables
under consideration are exogenous at conventional significant levels.20 This suggests that our resultsin Table 5 will not be biased. Overall, this test confirms the view that our results are less susceptible toendogeneity concerns, and thus provide confidence in our evidence that our corporate governance19

For example, a firm with an A－ rating from S&P and an A＋ rating from R&I receive an averagevalue of 14.75.
20 The relation between corporate governance and yield spreads could be less subject toendogeneity problems because changes in corporate governance will be reflected in bond yields
immediately, but it is unlikely that changes in bond yields affect corporate governance quickly (Klock, etal., 2005).
- 19 -

variables are significantly related to the costs of public debt financing.

6. Conclusion
In this paper, we empirically test the relation between corporate governance mechanisms inJapan and the costs of public debt financing. In particular, our analyses evaluate competing hypotheses
about the impact of corporate governance on the costs of public debt financing, with special attention
to three mechanisms: CEO ownership, family ownership, and corporate ownership. The overall
conclusion is that corporate governance structures in Japan significantly influence the costs of public
debt financing.
Using a sample of Japanese straight corporate bonds during the period 2005-2008, we find that
CEO ownership is positively correlated with yield spreads after controlling for firm- andbond-characteristics. This suggests that firms in which the CEO dominates have higher costs of public
debt financing because of the potential agency problem with bondholders. In addition, family
ownership is also positively associated with yield spreads, suggesting that bondholders are concerned
about agency conflicts with family firms, and so family firms experience higher costs of public debt
financing. Third, corporate ownership is related to lower yield spreads. This indicates that firms witheffective governance mechanisms are rewarded with lower yields.
In addition, we provide several additional results. First, managerial ownership is associated withhigher yield spreads. Second, among family firms, family firms in which the firm founder occupies a
top director position, and family members are major shareholders face higher yield spreads. Finally, ahigher proportion of directors from corporate shareholders is related to lower yield spreads. To checkthe robustness of our results, we test various regression models. Our results are robust to alternative
specifications with respect to the types of security firms serving as bond underwriters, inclusion offinancial institution ownership, sample selection concerns, nonlinearities in credit rating and leverage,
adjusted credit rating variable, and endogeneity concerns.
Consequently, we provide strong evidence that corporate governance systems in Japansignificantly affect the costs of public debt financing. This paper contributes to the existing literatureson the determinants of at-issue bond yields by showing that corporate governance systems in Japan are
significantly associated with the costs of public debt financing, and then these costs vary with thecharacteristics of corporate governance systems.

- 20 -

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Table 1. Credit rating numerical conversions

Conversion no.
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1

S&P
AAA
AA+
AA
AA－
A+
A
A－
BBB+
BBB
BBB－
BB+
BB
BB－
B+
B
B－
CCC
CC
C

Moody’s
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa
Ca
C

JCR
AAA
AA+
AA
AA－
A+
A
A－
BBB+
BBB
BBB－
BB+
BB
BB－
B+
B
B－
CCC
CC
C

R&I
AAA
AA+
AA
AA－
A+
A
A－
BBB+
BBB
BBB－
BB+
BB
BB－
B+
B
B－
CCC
CC
C

Notes: This table presents the credit rating conversion codes for the S&P, Moody’s, JCR, and R&I used in the analysis.

- 24 -

Table 2. Descriptive statistics of bond characteristics, governance measures, and firm characteristics

Variables(a) Bond characteristics
Spread (basis points)
AmountMaturity (years)
Times
Credit rating

Mean

MedianStd.dev.

Maximum Minimum

44.370
4.988
6.258
2.746
13.88836.600
4.605
5.000
2.970
14.00032.411
0.608
2.501
1.130
1.956

267.400
7.601
20.0004.543
18.333

0.800
3.401
3.000
0.000
9.000

Corporate director
CEO tenure
Outside director
Board size

0.007
0.010
0.078
0.041
0.005
0.023
0.028
0.014
0.054
0.050
0.066
0.134
12.075

0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.100
11.000

0.041
0.046
0.268
0.197
0.068
0.151
0.165
0.118
0.136
0.134
0.248
0.149
4.156

0.338
0.505
1.000
1.000
1.000
1.000
1.000
1.000
0.672
0.923
1.000
0.800
31.000

0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
5.000

(c) Firm characteristics
ROA
Working capital
LeverageMarket-to-book ratio
Firm size
Firm age
Dividend

0.022
0.020
0.215
1.221
14.066
4.001
0.052

0.029
0.008
0.201
1.170
14.190
4.127
0.014

0.179
0.059
0.113
0.376
1.152
0.796
0.152

0.282
0.235
0.499
4.360
17.2954.828
1.254－1.779－0.1840.000
0.167
10.561
0.693
0.000(b) Governance measures
CEO ownershipManagerial ownership
Family ownershipFounder ownershipFounder management
Descendant ownership
Descendant management
Outsider management
Corporate ownership

Notes: This table presents summary statistics－means, medians, standard deviations, maximums, and minimums－
for the variables used in the analysis. The sample comprises 640 firm-year observations on 196 firms during theperiod 2005-2008.

- 25 -

Table 3. Year and industry distribution of the sample
Pa nel A . Year distribution
Year
No. of firms
No. of firm-year observations
2005
80
138
2006
83
156
2007
111
206
2008
70
140
Pa nel B . Industry distribution
Industry
No. of firms
No. of firm-year observations
Construction
5
11
Foods
14
37
Texitles3
6
Pulp and paper
414Chemicals
16
43
Drug and medicine
1
3
Oil and coal3
10
Rubber4
9
Glass and ceramics
615
Iron and steel
746
Nonferrous metals
7
22
Metal products
22
General machinery
10
28
Electronic equipment
22
61
Transport equipment
13
33
Precision equipment
3
7
Other products
56Land transportation
17
72
Marine transportation
3
7
Air transportation
1
5
Warehouse
3
7
Information and communication
933
Wholesale
870
Retail10
14
Real estate
1773Service36Notes: This table shows the distribution of 640 firm-year observations on 196 firms during the period 2005-2008. Panel A presents the
fiscal year distribution of the sample, and Panel B shows the industry distribution of the sample. Industry classifications come from theJapan Company Handbook.

- 26 -

Table 4. Correlation coefficients between yield spreads and corporate governance variables
V ariables

SpreadCEO ownership0.501

CEO ownership

Family ownership

Corporate ownership

CEO tenure

Outside director(0.000)
Family ownership

Corporate ownership

CEO tenure

Outside director

Board size

0.352

0.589

(0.000)(0.000)－0.024－0.050－0.066(0.544)(0.211)(0.094)

0.235

0.482

0.464

－0.059(0.000)(0.000)(0.000)(0.134)

0.095

0.052

0.084

－0.028－0.071(0.017)(0.189)(0.034)(0.488)(0.074)－0.157－0.157－0.203－0.069－0.154－0.148(0.000)(0.000)(0.000)(0.080)(0.000)(0.000)Notes: This table provides the correlation coefficients between variables including spread, CEO ownership, family ownership, corporate ownership, CEO tenure, outside
director, and board size. The sample covers 640 firm-year observations on 196 firms during the period 2005-2008. Significance level is provided in parentheses below eachcoefficient.

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Table 5. Corporate governance and yield spreads
V ariables
CEO ownership
CEO tenure

1
3.677***(0.361)
0.007(0.049)20.436***(0.104)

Family ownership
Corporate ownership

Outside director
Board size
AmountMaturity
Times
Credit rating
ROA
Working capital
LeverageMarket-to-book ratio
Firm size
Firm age
Dividend

R2
No. of observations

3

0.031
(0.096)0.001(0.003)0.039*(0.021)0.008***(0.003)－0.033*(0.017)－0.067***(0.009)－0.465***(0.061)－0.541*(0.310)0.267**(0.126)－0.004(0.048)－0.040**(0.019)－0.062***(0.023)－0.262***(0.080)0.678－0.004(0.101)
0.004(0.003)0.047**(0.023)0.006**(0.003)－0.017(0.020)－0.071***(0.010)－0.489***(0.061)－0.647**(0.301)0.405**(0.164)0.014(0.049)－0.042*(0.023)－0.086***(0.022)－0.366***(0.076)0.636－0.483***(0.126)0.012(0.110)0.000(0.004)0.061**(0.025)0.008**(0.003)－0.019(0.023)－0.067***(0.011)－0.423***(0.070)－0.952***(0.329)0.464**(0.189)0.040(0.049)－0.091***(0.030)－0.091***(0.025)－0.429***(0.091)
0.607

640

640

640

4
3.117****(0.367)－0.025(0.052)0.162**(0.080)－0.211**(0.090)0.015(0.093)0.002(0.003)0.041***(0.021)0.007**(0.003)－0.029*(0.017)－0.064***(0.010)－0.459***(0.055)－0.530*(0.286)
0.281**(0.122)－0.023(0.048)－0.041**(0.018)－0.070***(0.023)－0.289***(0.069)0.685
640

Notes: This table reports the regression results for 640 straight corporate bond issues during the period 2005-2008.
Coefficients are estimated using ordinary least squares. All equations include industry- and year-specific variables.
Standard errors in parentheses are robust to heteroskedasticity, and adjusted for firm clustering. ***, **, and * denotesignificance at the 1%, 5%, and 10% level, respectively.

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Table 6. Corporate governance and yield spreads: additional results
Variables
CEO ownershipManagerial ownership
CEO tenure
Family ownership1

2.611***(0.573)－0.016(0.050)0.163*(0.090)Founder ownershipFounder management
Descendant ownership
Descendant management
Outsider management
Corporate ownership2－0.220**(0.090)－0.027(0.052)0.165**(0.081)
0.762***(0.121)－0.192(0.166)0.073(0.073)0.075(0.073)0.011(0.109)－0.244***(0.089)Corporate director
Outside director
Board size
AmountMaturity
Times
Credit rating
ROA
Working capital
LeverageMarket-to-book ratio
Firm size
Firm age
Dividend

R2
No. of observations

0.045(0.098)0.002(0.003)0.043**(0.021)0.007**(0.003)－0.025(0.018)－0.064***(0.010)－0.465**(0.056)－0.548*(0.289)0.305**(0.130)－0.017(0.048)－0.043**(0.019)－0.073***(0.023)－0.295***(0.065)
0.676
640

3
3.143***(0.368)－0.011(0.090)0.000(0.003)0.049**(0.022)0.009***(0.003)－0.028(0.018)－0.066***(0.009)－0.499***(0.051)－0.446(0.291)0.340***(0.128)0.049(0.055)－0.032*(0.018)－0.077***(0.023)－0.415***(0.111)0.683
640－0.228***(0.084)0.008(0.093)0.002(0.003)0.040*(0.021)0.007**(0.003)－0.028(0.017)－0.064***(0.009)－0.466***(0.055)－0.503*(0.292)0.280**(0.123)－0.022(0.049)－0.039**(0.018)－0.068***(0.023)－0.279***(0.068)0.684
640

Notes: This table reports the regression results for 640 straight corporate bond issues during the period 2005-2008. Coefficients are
estimated using ordinary least squares. All equations include industry- and year-specific variables. Standard errors in parentheses are robustto heteroskedasticity, and adjusted for firm clustering. ***, **, and * denote significance at the 1%, 5%, and 10% level, respectively.

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Table7. Corporate governance and yield spreads: robustness checks
Variables
CEO ownership
CEO tenure
Family ownership
Corporate ownership1
3.130***(0.369)－0.027(0.052)0.161**(0.080)－0.208**(0.090)Financial institution ownership
Outside director
Board size
AmountMaturity
Times
Credit rating

0.014(0.093)0.002(0.003)0.042*(0.021)0.007**(0.003)－0.029(0.017)－0.064***(0.010)22.988***(0.361)－0.023(0.051)0.159*(0.082)－0.273***(0.103)－0.135(0.163)－0.009(0.100)0.002(0.003)0.042**(0.021)0.007**(0.003)－0.031*(0.017)－0.065***(0.009)3
3.112***(0.362)－0.027(0.053)0.161**(0.081)－0.213**(0.092)4
3.028***(0.360)－0.022(0.051)0.158*(0.080)－0.221**(0.092)53.250***(0.358)－0.004(0.051)0.162**(0.071)－0.253***(0.081)6
3.140***(0.372)－0.026(0.051)0.171**(0.081)－0.210**(0.092)0.013(0.093)0.002(0.003)0.041*(0.021)0.007**(0.003)－0.028(0.017)－0.064***(0.010)0.030(0.090)0.001(0.003)0.035*(0.020)0.008***(0.003)－0.023(0.017)－0.061***(0.010)0.066(0.086)0.001(0.003)0.025(0.020)0.007**(0.003)－0.024(0.016)－0.515***(0.087)0.018***(0.003)0.001(0.094)0.002(0.003)0.042**(0.021)0.008***(0.003)－0.028(0.018)Credit rating2
Adjusted credit rating
ROA
Working capital
Leverage－0.377***(0.058)－0.429(0.280)0.274**(0.112)－0.027(0.060)－0.037(0.032)－0.071***(0.024)－0.288***(0.069)－0.434***(0.054)－0.508*(0.276)－0.477(0.331)
1.077**(0.464)－0.029(0.048)－0.045**(0.018)－0.072***(0.023)－0.329***(0.068)－0.062***(0.009)－0.459***(0.054)－0.512*(0.282)0.261**(0.127)－0.054(0.043)－0.043**(0.017)－0.051**(0.022)－0.228***(0.061)－0.021(0.047)－0.036*(0.019)－0.073***(0.022)－0.268***(0.071)

0.008(0.063)
0.685
640

0.691
640

0.716
640

0.684
640

－0.459***(0.054)－0.539*(0.284)0.281**(0.121)－0.470***(0.052)－0.533*(0.286)
0.291**(0.123)－0.461***(0.059)－0.543*(0.292)0.289**(0.146)－0.024(0.048)－0.042**(0.019)－0.070***(0.023)－0.287***(0.069)－0.010(0.020)－0.023(0.048)－0.039**(0.018)－0.071***(0.024)－0.291***(0.071)0.685
640Leverage 2
Market-to-book ratio
Firm size
Firm age
Dividend
Bank underwriting
Inverse mills ratio

R2
No. of observations

0.685
640

Notes: This table reports the regression results for 640 straight corporate bond issues during the period 2005-2008. Coefficients are estimated using ordinary least squares.
All equations include industry- and year-specific variables. Standard errors in parentheses are robust to heteroskedasticity, and adjusted for firm clustering. ***, **, and *denote significance at the 1%, 5%, and 10% level, respectively.

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