Firm Life Cycle and Cost of Debt

Abstract

This paper examines the relation between the corporate life cycle and lending spreads. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find that mature firms pay lower lending spreads. This reduction is incremental to the variation explained by financial controls that may have previously been thought to sufficiently account for variation in the corporate life cycle. In our multivariate analysis, continuous measures of maturity yield point elasticities with effects as large as 1.50 bps while categorical life cycle measures indicate that firms in the introduction and decline phases pay lending spreads that are greater than firms in the mature phase (6 percent and 12 percent, respectively). We explore omitted variables bias and instrumental variable estimation in robustness testing and find these patterns persist. Our findings are consistent with theoretical predictions regarding the relationship between the corporate life cycle and various lending risks.

Keywords: Firm life cycle, cost of debt, bank loans, risk

JEL Classification: G32, M21