Is short-term debt a substitute for or complementary to good governance?

Short-term debt can reduce potential agency conflicts between managers and shareholders by exposing managers to more frequent monitoring by the credit market. Using an international dataset, we examine whether internal monitoring can substitute for external monitoring through the use of short-term debt. We find that the relationship between debt maturity and governance depends on the institutional environment in a given country. In common-law countries and in countries with stronger investor protection rights, governance and short-term debt act as substitutes. The extent of creditor rights, state-level governance quality, cultural characteristics, and economic development levels of countries also play a role in explaining the relationship between governance and debt maturity.