Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt

35 Pages Posted: 27 Jun 2001 Last revised: 21 Apr 2014

David M. Reeb

National University of Singapore

Sattar Mansi

Virginia Tech

John G. Allee

American University - Kogod School of Business

Abstract

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.

Suggested Citation

Reeb, David M. and Mansi, Sattar and Allee, John G., Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt. Journal of Financial and Quantitative Analysis, September 2001. Available at SSRN: https://ssrn.com/abstract=272292 or http://dx.doi.org/10.2139/ssrn.272292

David M. Reeb (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

Sattar Mansi

Virginia Tech ( email )

John G. Allee

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202-885-1995 (Phone)
202-885-1992 (Fax)

Paper statistics

Downloads
195
Rank
126,949
Abstract Views
2,677