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
Shareholders & Shareholder Activism
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.
Shareholders & Shareholder Activism
◦ 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?
Shareholders & Shareholder Activism
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.
Shareholders & Shareholder Activism
◦ 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
Creditors and Credit Rating Agencies
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)
Creditors and Credit Rating Agencies
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.
Creditors and Credit Rating Agencies
Individual Investors as lenders (bondholders)
◦ Individual investors can become creditors of a firm
by purchasing that firms bonds.
Creditors and Credit Rating Agencies
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).
Creditors and Credit Rating Agencies
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.
Creditors and Credit Rating Agencies
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.
Creditors and Credit Rating Agencies
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.
Creditors and Credit Rating Agencies
◦ 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.
Creditors and Credit Rating Agencies
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.
Creditors and Credit Rating Agencies
◦ 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.
Creditors and Credit Rating Agencies
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
