creditors and credit rating agencies
so far we have discussed corporate governance as if only stockholders should care about it. However, those who lead money to the firm (I,e,creditors) are also important investors in the firm. Therefore, lenders also care about corporate governance because a well run firm is more likely to have the cash to pay off its loans. In general, there are two kinds of lenders, institutional lenders such as a commercial bank, pension or insurance company and individual in vestors. While both kinds of lenders have the same corporate governance concerns, the institutional lender typically makes a larger loan and , hence , has more incentive to monitor the actions of the firm.
Creditors can trade their claims just as stockholders can. For example, bondholders can sell their bonds to other investors (and banks can sell their loans too, but primarily to other institutions.) If firms suffer from poor corporate governance, than the value of their bonds might decline just like poor corporate governance then lenders may get back only pennies on the dollar of their loan.
While a bank may find it worthwhile to monitor the firm that they lend to (because millions, even billions, could be at stake), individual bondholders may not have the resources to do so. Fortunately debt, in and of itself, could be a governance mechanism (we will explain this in more detail soon). Further, there are also credit rating agencies that rate the safety level of corporate debt. As such, they can provide important information to potential bond
investors. Therefore the existence of corporate debt creates three important
corporate system monitors or devices:
1. monitoring by institutional lenders;
2. debt, in and of itself, can be a disciplinary mechanism; and
3. monitoring and debt ratings by credit agencies.