Firm-Level Determinants of the Cost of Debt: New Empirical Evidence from a Bank-Based Economy

The purpose of this paper is to investigate the firm-level determinants of the cost of debt in a bank-based emerging economy, where debt serves as the primary external financing mechanism, enabling firms to maintain operations, pursue growth opportunities, and ensure long-term financial sustainability. Using panel data from non-financial firms listed on the Casablanca Stock Exchange over the period 2018–2024, we document a robust nonlinear relationship between financial leverage and the cost of debt, whereby low and moderate debt levels reduce borrowing costs by signaling creditworthiness and financing capacity, while excessive indebtedness reverses this effect, with an optimal threshold estimated at approximately 34.8% of total assets. Firms with stronger growth prospects further benefit from more favorable financing conditions, as creditors interpret sustained asset expansion as a signal of financial strength and long-term viability. Financial performance is also found to reduce the cost of debt, although this effect is not fully robust to endogeneity controls. In contrast, asset tangibility, firm size, firm age, and liquidity do not emerge as significant determinants, suggesting that creditors in the Moroccan market adopt a financial health-oriented approach when assessing credit risk, placing greater emphasis on leverage and growth prospects than on collateral-based or reputational signals. Overall, the study highlights the coexistence of linear and nonlinear dynamics in debt pricing, thereby enriching the corporate finance literature and providing insights for managers and policymakers seeking to reduce borrowing costs, enhance access to debt financing, and support sustainable value creation.