Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt
David M. Reeb
National University of Singapore; Temple University
Virginia Polytechnic Institute & State University
John G. Allee
American University - Kogod School of Business
Journal of Financial and Quantitative Analysis, September 2001
Recent research suggests that firm internationalization is associated with greater exchange rate risk and a higher cost of equity capital. However, there is no research on the relation between the level of firm international activity and the cost of debt financing. This study offers the first such empirical evidence using non-provisional public debt. Based on a sample of 2,194 U.S. firm-year observations, we find that firms with greater levels of international activity have better credit ratings. We also find that the cost of debt financing is inversely related to the degree of firm internationalization beyond that incorporated in credit ratings. These results suggest that rating agencies do not fully incorporate firm international activity in their analysis resulting in a downward bias in credit ratings for international firms. In aggregate, the results imply that failing to incorporate firm international activity in debt pricing leads to potential omitted variable problems.
Number of Pages in PDF File: 35working papers series
Date posted: June 27, 2001 ; Last revised: November 11, 2009
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