Firm Reputation and the Cost of Debt Capital
Posted: 29 Jun 2011 Last revised: 22 May 2017
Date Written: 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. 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.
Keywords: firm reputation, firm intangibles, covenant restrictions, bankruptcy risk, cost of debt
JEL Classification: G11, G12, G14, G32, G33, M4, L14, D82
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