Essays on the Cost of Debt Capital for Private Firms

Abstract

Since corporate investment is a key driver for economic growth, it is very important to find out what are the drivers of the cost of financing for private firms. In particular, this thesis studies the determinants of spreads of bonds issued by advanced and emerging market borrowers and the determinants of foreign-currency corporate credit ratings. Chapter 1 demonstrates that the impact of debt market illiquidity on corporate bond spreads is exacerbated with a higher proportion of short-term debt. This effect is present in both investmentgrade and speculative-grade bonds and is smaller in banks as they may have the support of a lender of last resort during periods of market illiquidity. The paper’s major finding is consistent with the predictions of structural credit risk models that argue that a higher proportion of short-term debt increases the firm’s exposure to debt market illiquidity through a ‘rollover risk’ channel. Although credit rating agencies have gradually moved away from a policy of never rating a corporation above the sovereign (the ‘sovereign ceiling’), it appears that sovereign credit ratings remain a significant determinant of corporate credit ratings. Chapter 2 examines this link using credit rating data for advanced and emerging economies over the period of 1995 to 2009. The results are consistent with a sovereign ceiling ‘lite’ policy or ceiling that is not an absolute constraint, but a limitation that tends to decrease corporate ratings when these ratings are above the sovereign rating. Finally, chapter 3 investigates the impact of capital account restrictions on spreads of corporate bonds issued in international markets by developed and emerging market borrowers. The main finding is that capital account restrictions on inflows significantly increase corporate bond spreads. A second main finding is that capital account restrictions on inflows matter a great deal more during times of financial distress.