Agency Costs of Debt in Good Times

Research output: Working paperProfessional

Abstract

I exploit the introduction of a segment reporting reform (Statement of Financial Accounting Standards No. 131 (SFAS 131)) that reveals new financial information of firms' business units. A difference-in-difference estimation reveals that firms reported as single-segment before the reform and as multi-segment after the reform suffer a 10% increase in the yield spreads compared to standalone firms. The treatment effect is concentrated on firms with a high volatility in the growth options and a low coinsurance across segment units at the introduction of SFAS 131. This is consistent with bondholders being aware of a moral hazard problem arising out of inefficient internal capital markets and adjusting the cost of debt accordingly. I show that the agency costs of debt affect the (non-monotonic) relationship between a conglomerate firm's cost of debt and the correlation of its segment cash flows.
Original languageEnglish
PublisherSSRN
ISBN (Electronic)https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3047182
Publication statusPublished - 7 Oct 2017

Fingerprint Dive into the research topics of 'Agency Costs of Debt in Good Times'. Together they form a unique fingerprint.

Cite this