Corporate Governance: An International Review

Abstract

Research Question/Issue: The Voice versus Exit debate among institutional investors dissatisfied with corporate issuers remains narrowly framed: Academic inquiry is de facto limited to listed equities.This overlooks the role of governance in corporate financing, which due to refinancing cycles, represents a key lever for investors aiming to influence issuers.We investigate which impact mechanisms institutional investors can use across asset classes in stand-alone or mixed strategies to incentivize corporate transition towards aligning with the Paris Agreement. Research Findings/Insights:We propose a new investor impact mechanism-Denial of Unconditional (Re)financing-and contrast it with the classic Voice and Exit choices.Denial is the investor action around the time of issuance, affecting realized demand in the book building of each issue.Conditional refinancing (sustainability-linked debt with legally enforceable covenants) is its intended outcome.We argue that denial of unconditional (re)financing has a direct cash flow effect which is particularly strong when the company needs to repay existing debt at maturity.We provide clinical anecdotal evidence for the feasibility of both stages: (i) For the conditional refinancing outcome, we document the over $300bn self-declared sustainabilitylinked bond market based on Bloomberg data, demonstrating that an enforceable conditional instrument exists at scale (ii) with respect to the denial of unconditional refinancing, we show that bond issuance volumes in the segment with maturities over 20 years have declined even for the top credit-rated fossil fuel majors, a pattern consistent with constrained access to long-dated unconditional debt.Theoretical/Academic Implications: We extend Hirschman's Exit versus Voice framework with a third investor impact mechanism and map all three across asset classes and the stages of the (re)financing cycle.The conditionality of refinancing warrants further consideration.More generally, the governance of corporate financing via sustainability-related covenants (akin to financial covenants) appears to be a promising area for future corporate governance research beyond studying shareholders.

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