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Determinants of the Cost of Debt and Their Influence on the Capital Structure

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  • Andreea SEMENESCU

    (Faculty of Finance, Insurance, Banks and Stock Exchange, Bucharest Academy of Economic Studies, Bucharest, Romania)

  • Cristina BADARAU

    (Laboratory for Analysis and Research in Economics and International Finance, University Montesquieu Bordeaux IV, Bordeaux, France)

Abstract

This paper deals with the cost of debt and its impact on the financing decision of the companies, in the context of the informational asymmetry between the firm and the lender, which is in mostly a bank. The banks finance the direct investment projects of different companies by assessing the debtor risk profile roughly, using a risk classification system usually compounded of five risk classes established according to risk methodologies specific for each bank. The cost of capital is established according to the risk class in which the debtor is included. This study revisits the determinants of the cost of debt, as a start point for an analysis of the opportunities of the companies to influence the cost of debt by the signals transmitted to the banks. We realize an empirical verification of a model regarding the impact of macroeconomic factors on the cost of debt and propose a model for analyzing the role of the informational asymmetry in establishing the cost of debt for companies. The model proves a complex impact of the income tax rate on the cost of debt, consisting in a negative effect due to the tax shields, but also in a direct one due to the effect of the taxation on the value of the own capital. The informational asymmetry also determines the increase of the cost of debt. The article inventories the determinants of the cost of debt as a start point in studying the behaviour of the companies influencing the cost of capital.

Suggested Citation

  • Andreea SEMENESCU & Cristina BADARAU, 2011. "Determinants of the Cost of Debt and Their Influence on the Capital Structure," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 4(3(15)), pages 175-182.
  • Handle: RePEc:wun:journl:tje:v04:y2011:i3(15):a06
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    Keywords

    assymetric information; capital structure; cost of capital; credit market; risk classification;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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