The effects of divergence between cash flow and voting rights on the relevance of fair disclosure and credit ratings

This study investigates the effects of governance structure on the relationship between disclosure quality and credit ratings. Firms with greater control-ownership divergence are more likely to pursue their private interests because controlling shareholders obtain the benefit of managerial decision in accordance with controlling interest and they bear the related risk only to the shareholding value. The greater divergence decreases the level of disclosure, thereby increasing the information asymmetry and agency problems, and, ultimately may be harmful to the firms' sustainability. We analyze data from the listed Korean companies belonging to a large business group that issued corporate bonds for the period 2003-2015, and find that there is a positive relationship between fair disclosure and credit ratings; however, it is weakened as the control-ownership divergence increases. These results suggest that firms with a high quality of disclosure are assigned better credit ratings. However, if their governance structures are poor, the capital market may penalize the reliability of the released information.