Firm Reputation and the Cost of Debt Capital
Virginia Tech Pamplin Business School
A. Joseph Warburton
Syracuse University - College of Law; Syracuse University - Whitman School of Management
University of Georgia - C. Herman and Mary Virginia Terry College of Business
March 9, 2016
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 while controlling for the impact of firm-level variables, we find an inverse relation between a company’s reputation and its bond (bank loan) 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 (private) debt.
Number of Pages in PDF File: 41
Keywords: firm reputation, firm intangibles, covenant restrictions, fraud, bankruptcy risk, cost of debt
JEL Classification: G11, G12, G14, G32, G33, M4, L14, D82
Date posted: June 29, 2011 ; Last revised: March 22, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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