The Cost of Debt and Its Economic and Financial Drivers: An Empirical Study of European Companies

This study aims to define the relationship between the cost of debt and firm financial performance measures. To this end, a multiple linear regression model has been applied on a sample of European companies issuing bonds traded on Euronext. The analysis considers data relating to the period 2019-2023. Specifically, the work tests the impact of measures concerning company size, liquidity, solidity and profitability on the yield to maturity. The independent variables are the following- net working capital to total assets ratio, return on assets, logarithm of revenues, leverage, interest coverage ratio, current ratio and the coefficients of variation of operating profit and net income. Consistent with the literature on this topic, size has a significant and inverse impact on the cost of debt. For the other variables, the regression also returns coefficients in line with expectations. The resulting model allows for estimating the cost of debt by applying the coefficients to a company’s financial data. Even if the company is not publicly traded, the relationship returns a measure of its debt capital cost. This study contributes to the research on the cost of debt, a central topic in corporate finance. It also provides practical implications for corporate management by raising awareness of the drivers that influence the cost of debt capital and offering the opportunity to optimize financial decisions.