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Journal of Financial and Quantitative Analysis Vol. 57 No. 8 2022

Agency Costs of Debt in Conglomerate Firms

Michela Altieri1,2,3,4,5,6,7

1 Goethe University Frankfurt · 2 European Central Bank · 3 The University of Melbourne · 4 Tilburg University · 5 Maastricht University · 6 Financial Research (Hungary) · 7 Vrije Universiteit Amsterdam

open access

Abstract

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.

DOI
10.1017/s0022109021000661
Volume
57
Issue
8
Pages
3048-3080
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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