Debt and Corporate Governance

Abstract

This chapter focuses on the evolving role of debt as a tool of corporate governance, or debt governance, within the context of developments in the private credit market. It first discusses debt’s traditional function, with particular emphasis on illiquid loans and the lenders’ reliance on monitoring and covenants in order to manage a borrower’s credit risk. It then considers how loans and lending relationships have evolved over time in light of the increased liquidity of traditionally private instruments. One outcome for debt governance may be a shift from the traditional dependence on covenants and monitoring to a greater reliance on the disciplining effect of liquid credit instruments.

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