Firm Reputation and the Cost of Bank Debt
51 Pages Posted: 12 Aug 2019 Last revised: 19 Feb 2020
Date Written: September 30, 2019
This paper examines whether firm reputation impacts borrowing costs and thus investment. Using unique data from Fortune’s Most Admired Companies surveys, I find that reputable borrowers enjoy lower borrowing costs and receive more favorable loan contract terms. My identification strategy is based on propensity score matching, a regression discontinuity design, and clean reputation measures removing the impact of prior financial performance. Further evidence suggests that banks reward reputable firms with better contract terms because this reputation proxy contains incremental information on borrower future performance and credit risk. Last, firms increase capital expenditures and R&D after receiving the Most Admired designation, consistent with reputable firms exploiting their lower cost of capital and with reputation having real effects on firms’ investment policies.
Keywords: Firm reputation, Cost of bank debt, Investment, Information asymmetry
JEL Classification: G14, G21, G32, M3, L14, D82
Suggested Citation: Suggested Citation