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Agency Costs of Debt in Conglomerate Firms

Published online by Cambridge University Press:  14 October 2021

Michela Altieri Open the ORCID record for Michela Altieri [Opens in a new window]
Michela Altieri*
Affiliation:
Luiss Guido Carli Department of Business and Management
*
maltieri@luiss.it
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Abstract

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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 3048 - 3080
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NCCreative Common License - ND
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives licence (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is unaltered and is properly cited. The written permission of Cambridge University Press must be obtained for commercial re-use or in order to create a derivative work.
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank an anonymous referee and Paul H. Malatesta (the editor) for a careful and constructive review of the article. This article received useful comments by Tanja Artiga-Gonzales, Marc Deloof, Florian Heider, Elisabeth Kempf, Marie Lalanne, and Giovanna Nicodano. I also thank the participants in the finance seminars at SAFE (Goethe University), Tilburg University, Maastricht University, European Central Bank Financial Research Division, Vrije University Amsterdam, the University of Melbourne, and HEC-Montreal. I also thank the participants at the 2018 CICF conference, Ni Chenkai and Vojislav Maksimovic for acting as discussant, the participants at the 2017 EFA Annual Meeting, at the World Finance conference, and at the 2019 ESSFM (Corporate Finance Week) in Gernzensee. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. All errors are mine. The usual disclaimer applies.

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