Agency Costs of Debt in Conglomerate Firms

72 Pages Posted: 4 Oct 2017 Last revised: 16 May 2022

Date Written: October 22, 2020

Abstract

I use an accounting reform to assess the agency cost of debt in diversified firms. Those firms that switch from single to multiple segments following the reform suffer a 12% increase in their bond spread when compared to their stand-alone peers. Consistent with lenders anticipating under-investment and asset substitution incentives, diversified firms with high cash-flow volatility across divisions suffer the highest increase in borrowing costs. I employ a novel approach that allows abstracting from unobservable characteristics that would otherwise influence the pricing of diversified firms' debt.

Keywords: Diversified Firms, Cost of Debt, Free Cash Flow, Subsidiary Debt, Internal Capital Markets, Bonds

JEL Classification: G12, G15, G30, L22

Suggested Citation

Altieri, Michela, Agency Costs of Debt in Conglomerate Firms (October 22, 2020). Available at SSRN: https://ssrn.com/abstract=3047182 or http://dx.doi.org/10.2139/ssrn.3047182

Michela Altieri (Contact Author)

Luiss Guido Carli ( email )

viale Romania 32
Rome, ND RM 00197
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
194
Abstract Views
1,821
Rank
285,797
PlumX Metrics