Firm Reputation and Cost of Debt Capital

Anginer, Deniz and Mansi, Sattar and Warburton, A. Joseph and Yildizhan, Celim (2011): Firm Reputation and Cost of Debt Capital.

Abstract

We examine the relation between firm reputation and the cost of debt financing. We posit that corporate reputation represents “soft information” not captured by balance sheet variables, which is nonetheless valuable to lenders. Using Fortune magazine’s survey of company reputation, we find an inverse relation between a company’s reputation and its bond credit spreads. We also find that firms with high reputation face less stringent covenants and are less likely to be the target of SEC fraud investigations. Further testing shows that bad reputation is a good ex ante predictor of corporate failure. Our study provides evidence that firm reputation is an important consideration in the pricing of corporate public debt.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cost of debt and firm reputation, cost of capital and firm reputation, credit risk and firm reputation, cost of debt and firm intangibles, covenant restrictions and firm reputation, fraud and firm reputation, bankruptcy risk and firm reputation
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing

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