Corporate Governance, Capital Structure, and Investment : Evidence from a Natural Experiment

How does improvement in corporate governance impact firms' financing policies and investment behavior? Using a reform that improved shareholder oversight via mandatory audit committee, I document that improved corporate governance leads to lower net debt issuance, lower firm leverage, and higher equity issuance. Contrary to the hypothesis that strengthening shareholder oversight increases agency cost of debt, I find that debt repayment improves, new debt has lower collateral requirements, and is from well-capitalized banks. Consistent with equity governance substituting the disciplining role of debt, I find that better corporate governance improves capital allocation by reducing value-destroying investments. Overall, this paper provides evidence that improvement in equity governance lowers debt usage by substituting the disciplining role of debt and mitigates debt-equity agency conflicts