Information Environment and the Cost of Borrowing in the International Bond Market
36 Pages Posted: 15 Nov 2019
Date Written: October 1, 2019
We examine whether and how a firm's information environment – as characterized by earnings quality, analyst forecast dispersion, and the probability of informed trading – affects its total cost of borrowing in the international bond market. Both yield spread required by investors and the issuance costs such as underwriting fee, management fee and selling concession fee are examined. Using a sample of Eurobonds issued by firms across 38 countries, we find that bonds issued by firms with poor information environments are associated with higher yield spreads, lower credit ratings, greater probability of split bond ratings, and higher issuance cost. The firms characterized by poorer information environment are considered riskier issuers by underwriters, thus bonds issued by these firms are more likely to be offered in syndication by more managers and are charged with higher fees. We demonstrate that information environment plays a crucial role in determining the total cost of borrowing for firms raising capital in the international bond market.
Keywords: information environment, borrowing costs, international bond market
JEL Classification: G12, G14, M41, M48
Suggested Citation: Suggested Citation