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The cost of firms’ debt financing and the global financial crisis

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  • Daniele Pianeselli

    ()
    (Bank of Italy)

  • Andrea Zaghini

    ()
    (Bank of Italy)

Abstract

We provide an assessment of the determinants of the risk premium paid by non-financial corporations on long-term bonds. By looking at 5,500 issues in the period 2005-2012, we find that the turbulence in the sovereign debt market has been a major driver of corporate risk in recent years. Compared with 2005-07, the three years preceding the global financial crisis, in 2010-12 Italian, Spanish and Portuguese firms paid an additional premium of between 70 and 120 basis points on average due to the negative spillovers from the sovereign debt crisis, while German firms received a discount of 40 basis points.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 950.

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Date of creation: Feb 2014
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Handle: RePEc:bdi:wptemi:td_950_14

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Keywords: corporate bonds; risk-premium; too-big-to-fail; sovereign debt crisis;

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  1. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
  2. Sironi, Andrea, 2003. " Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-72, June.
  3. Cantillo, Miguel & Wright, Julian, 2000. "HOw Do Firms Choose Their Leaders? An Empirical Investigation," Research Program in Finance, Working Paper Series qt8sd393sj, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  4. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
  5. Giuseppe Grande & Aviram Levy & Fabio Panetta & Andrea Zaghini, 2011. "Public Guarantees on Bank Bonds: Effectiveness and Distortions," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2011(2), pages 47-72.
  6. Barry, Christopher B. & Mann, Steven C. & Mihov, Vassil & RodrĂ­guez, Mauricio, 2009. "Interest rate changes and the timing of debt issues," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 600-608, April.
  7. Shi, Charles, 2003. "On the trade-off between the future benefits and riskiness of R&D: a bondholders' perspective," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 227-254, June.
  8. Blackwell, David W. & Kidwell, David S., 1988. "An investigation of cost differences between public sales and private placements of debt," Journal of Financial Economics, Elsevier, vol. 22(2), pages 253-278, December.
  9. Denis, David J. & Mihov, Vassil T., 2003. "The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings," Journal of Financial Economics, Elsevier, vol. 70(1), pages 3-28, October.
  10. Gerlach, Stefan & Schulz, Alexander & Wolff, Guntram B., 2010. "Banking and sovereign risk in the euro area," Discussion Paper Series 1: Economic Studies 2010,09, Deutsche Bundesbank, Research Centre.
  11. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
  12. Sebastian Schich & Sofia Lindh, 2012. "Implicit guarantees for bank debt: where do we stand?," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2012(1), pages 45-63.
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Cited by:
  1. Andrea Zaghini, 2014. "Bank bonds: size, systemic relevance and the sovereign," Temi di discussione (Economic working papers) 966, Bank of Italy, Economic Research and International Relations Area.
  2. Zaghini, Andrea, 2014. "Bank bonds: Size, systemic relevance and the sovereign," CFS Working Paper Series 454, Center for Financial Studies (CFS).

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