Cost of Loans and Moral Hazard

37 Pages Posted: 26 Apr 2021

See all articles by Clara Fernström

Clara Fernström

affiliation not provided to SSRN

Yingjie Qi

Copenhagen Business School

Date Written: April 23, 2021


We document the effects of higher borrowing cost on private firms by exploiting a novel quasi-experiment and a unique and comprehensive dataset from Sweden. In June 2010, the central bank of Sweden increased the repo rate unexpectedly and exposed firms with long term loans maturing right before or after the hike to different cost of borrowing. Consistent with the debt overhang theory, we find that higher cost of borrowing has a significant negative effect on investment, and more for highly levered firms. Contrary to the risk shifting theory, we find no evidence that distressed firms engage in activities that are riskier ex-post.

Keywords: debt overhang, risk shifting, cost of borrowing, loan maturity

JEL Classification: G30, G32

Suggested Citation

Fernström, Clara and Qi, Yingjie, Cost of Loans and Moral Hazard (April 23, 2021). Available at SSRN: or

Clara Fernström

affiliation not provided to SSRN

Yingjie Qi (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000

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