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Agency Costs of Debt in Conglomerate Firms

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  • Altieri, Michela

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 with their stand-alone peers. Consistent with lenders anticipating underinvestment 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.

Suggested Citation

  • Altieri, Michela, 2022. "Agency Costs of Debt in Conglomerate Firms," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(8), pages 3048-3080, December.
    • Handle: RePEc:cup:jfinqa:v:57:y:2022:i:8:p:3048-3080_6
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