Corporate Governance: By: 1. Kenneth A. Kim John R. Nofsinger and 2. A. C. Fernando

Corporate Governance
By: 1. Kenneth A. Kim

John R. Nofsinger
And
2. A. C. Fernando
Creditors and Credit
Rating Agencies
Lesson 15
Shareholders & Shareholder Activism
 Last Lecture Review
◦ Shareholders are innocent and helpless victims
when scandals occur.
◦ Two categories of investors
 Individual investors
 Institutional investors
◦ Institutional investors are more effective and

influential than the individual investors
 Benefits of Mutual Funds

◦ The advantage of professional investment
management.
◦ Funds managers have real access and information
about the market.
◦ Diversification in the investment.
◦ Low cost and high quality investing.
◦ Convenience and flexible.
◦ Mutual funds investment funds are liquid and easy to
withdraw.
Costs of Mutual Funds
 Hidden fee charges
◦ What is Shareholders activism?
◦ The goal of activists ranges from financial as well as
non-financial matters.
◦ Individual shareholders activism
◦ Monitoring by large shareholders
◦ Institutional Shareholders: An Overview
◦ Does Institution Shareholders activism works?
 Potential Roadblocks to effective Shareholders activism.
◦ Limited desire to be activists
◦ Many other options for investments
◦ Mgt don’t hire pension fund advisors who are trouble
makers for management
◦ Private/public funds normally go with management
activities.
◦ Law restricts them to become major OWNER of the firm.

◦ Long paperwork.
 International Perspective
◦ In west, we can see company discourages one investor
to become the significant owner
◦ In east, we can see greater owners i.e. family owner as
well as state owner.
Creditors and Credit Rating Agencies
 Lecture Outlines
◦ Introduction
 Who care about the firm 1. stock holders 2. Creditors
◦ Two types of lenders

 Commercial Banks
 Individual (bondholders)
◦ Credit Rating Agencies (CRAs)

◦ Analysis of the situation having different credit ratings
by different CRAs
 Introduction
◦ Who really cares about the firm?
 Stock holders
 Lenders (Creditors)
◦ We will discuss about the lenders attitude toward

corporate governance.
◦ There are basically two types of lenders
 Commercial banks
 Individual investors (bondholders)
 1. Commercial banks as lender
◦ Almost all banks have commercial lending departments

that loan money to companies to purchase equipment
and inventory to start or expand their businesses.
◦ One of the main revenue sources for banks is the
interest made on loans they lend.
◦ Firms financial position is taken into account before
issuing loans.
 Individual Investors as lenders (bondholders)

◦ Individual investors can become creditors of a firm
by purchasing that firms bonds.
 Creditors can trade their claims just as

stockholders
◦ Bond holders can also sell their bonds to other
investors (and banks can also sell their loans too
but primarily to other institutions).

 If firms suffer from poor corporate

governance, then the value of their bonds
might decline just like the value of stocks.
 If a firm collapses from poor corporate

governances then lenders may get back only
pennies on the amount 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.
 Debt, in and of itself, could be a governance

mechanism.
 Credit Rating agencies (CRA)- Government/Private
(all bonds need to be rated to attract the investors/creditors)
◦ CRA assesses the credit worthiness of an individual,

corporation, or even a country.
◦ Analysts rate stocks and CRA rate bonds for bond investors
(Creditors).
◦ Credit ratings are calculated from the financial history and

current assets and liabilities.
◦ CRA tells a lender or investors the probability of the

subject being able to pay back a loan.
◦ A poor credit rating indicates a high risk of defaulting

on a loan, and thus leads to high interest rates.
◦ Basically, CRA analyse the element of risk involved

with the bonds by having some grades which
determine the level of risk associated with.
 Analysis of the situation where a firm has
different credit ratings by different CRAs.
◦ CRAs Perspective
 Moody rating for a firm=AAA
 PACRA rating for a firm=AA
 Private rating for a firm=A
 Private as well as PACRA must have to evaluate their
expertise for credit rating purposes because Moody CRA is
having international image and a firm is always single
financial position which means having same credit rating if
evaluated by different CRAs.
◦ Firm’s perspective
 Firm must go for those CRAs whose reputation is good
because this will increase their bond value.
 So instead of going for private CRAs for, so called,

good and cheap ratings, it would be in the firm’s best
interest to have ratings from reputable CRAs, what if
they charge more for their services.
 It all depends upon firm’s financial position.

 Summary
◦ Introduction
 Who care about the firm 1. stock holders 2. Creditors
◦ Two types of lenders

 Commercial Banks
 Individual (bondholders)
◦ Credit Rating Agencies (CRAs)

◦ Analysis of the situation having different credit ratings
by different CRAs

Corporate Governance: By: 1. Kenneth A. Kim John R. Nofsinger and 2. A. C. Fernando

Uploaded by

Copyright:

Available Formats

Corporate Governance: By: 1. Kenneth A. Kim John R. Nofsinger and 2. A. C. Fernando

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corporate Governance: By: 1. Kenneth A. Kim John R. Nofsinger and 2. A. C. Fernando

Uploaded by

Copyright:

Available Formats

Corporate Governance

By: 1. Kenneth A. Kim

◦ Institutional investors are more effective and

 Benefits of Mutual Funds

◦ Law restricts them to become major OWNER of the firm.

◦ Two types of lenders

◦ Credit Rating Agencies (CRAs)

◦ We will discuss about the lenders attitude toward

◦ Almost all banks have commercial lending departments

 Individual Investors as lenders (bondholders)

 Creditors can trade their claims just as

◦ Bond holders can also sell their bonds to other

investors (and banks can also sell their loans too

but primarily to other institutions).

 If firms suffer from poor corporate

 If a firm collapses from poor corporate

 While a bank may find it worthwhile to monitor

 Debt, in and of itself, could be a governance

◦ CRA assesses the credit worthiness of an individual,

◦ Credit ratings are calculated from the financial history and

◦ CRA tells a lender or investors the probability of the

◦ A poor credit rating indicates a high risk of defaulting

◦ Basically, CRA analyse the element of risk involved

 So instead of going for private CRAs for, so called,

 It all depends upon firm’s financial position.

◦ Two types of lenders

◦ Credit Rating Agencies (CRAs)

You might also like