Corporate Governance and Access to Finance - ESBG

ANNEX 1: REVIEW OFTHE LITERATUREThe link between Corporate Governance (CG) and Access to Financeis a relative new topic of research which has not been largely studied.There is a significant amount of literature on both topics separately:(i) Corporate Governance, specifically on banking institutions, as well as(ii) the determinants and implications of Access to Finance, but much lessresearch has been done on the connection between both.The initial approach of Corporate Governance is to establish practicesto avoid the potential problems that arise when managers (agents)administer resources on behalf of the owners (principal) in a context ofasymmetric information. The agency problem arises when the agents, thathave superior information and specialized skills to manage the resourcesof the principal, behave opportunistically due to the lack of informationor abilities of the principal (Jensen & Meckling, 1976). The principal is theresidual claimant of the firm’s output because he/she assumes theresidual risk. Agency costs associated with this problem are assumed byresidual claimants who contract the professional services of managers.The goal of Corporate Governance mechanisms is to align the objectivesof the manager-Agent with the objectives of the owner-Principal.The most typical case is that of listed firms’ executives managing resourcesof a large and dispersed number of shareholders. The recommendedCorporate Governance practices are addressed to induce the managersto behave properly in the interest of shareholders through transparencymechanisms that reduce the asymmetry of information as well asintroducing control structures to make manager’s decisions accountableto shareholders. Reducing agency costs is a key element to generateconfidence of investors in companies listed in the stock markets.95