TY - JOUR
T1 - Firm life cycle and cost of debt
AU - Amin, Abu
AU - Bowler, Blake
AU - Hasan, Mostafa Monzur
AU - Lobo, Gerald J.
AU - Tresl, Jiri
N1 - Funding Information:
We thank the Editor, an anonymous associate editor, and an anonymous reviewer for their valuable comments and suggestions on the earlier draft of this paper. We also thank Philip Brown, Demian Berchtold, Robert Durand, Adrian Cheung, Jan Hanousek, Tatyana Sokolyk, Anastasiya Shamshur, Ozde Oztekin, Raunaq Pangaliya, Felix Chan, Zhuoli Axelton and the workshop participants at University of Western Australia, Central Michigan University, Texas A&M International University, Curtin University, and participants of the 2018 New Zealand Finance Meeting and the 2021 Hawaii Accounting Research Conference for helpful comments and suggestions. The research is supported by GAČR grant No. 19–20771S. The usual disclaimer applies.
Funding Information:
We thank the Editor, an anonymous associate editor, and an anonymous reviewer for their valuable comments and suggestions on the earlier draft of this paper. We also thank Philip Brown, Demian Berchtold, Robert Durand, Adrian Cheung, Jan Hanousek, Tatyana Sokolyk, Anastasiya Shamshur, Ozde Oztekin, Raunaq Pangaliya, Felix Chan, Zhuoli Axelton and the workshop participants at University of Western Australia, Central Michigan University, Texas A&M International University, Curtin University, and participants of the 2018 New Zealand Finance Meeting and the 2021 Hawaii Accounting Research Conference for helpful comments and suggestions. The research is supported by GAČR grant No. 19–20771S. The usual disclaimer applies.
Publisher Copyright:
© 2023
PY - 2023/9
Y1 - 2023/9
N2 - Theory provides several channels linking the corporate life cycle and lending risks. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find an economically significant relationship between firm life cycle stage and lending spreads. Based on the Owen and Yawson (2010) life cycle stage classification, young firms are expected to pay at least 15 bps more than mature firms, whereas mature firms pay at least 11 bps more than old firms. According to the Dickinson (2011) cash flow classification, firms in the introduction and decline phases pay lending spreads that are 6 and 12 percent greater than firms in the mature phase. We explore omitted variables bias and instrumental variable estimation in robustness testing to alleviate endogeneity concerns. A mechanism analysis shows that credit risk, systematic risk, and idiosyncratic risk follow the corporate life pattern in accordance with loan spreads, suggesting that banks charge a premium to compensate for risk. Our results support the theoretical prediction that structural changes occur as firms evolve across the corporate life cycle.
AB - Theory provides several channels linking the corporate life cycle and lending risks. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find an economically significant relationship between firm life cycle stage and lending spreads. Based on the Owen and Yawson (2010) life cycle stage classification, young firms are expected to pay at least 15 bps more than mature firms, whereas mature firms pay at least 11 bps more than old firms. According to the Dickinson (2011) cash flow classification, firms in the introduction and decline phases pay lending spreads that are 6 and 12 percent greater than firms in the mature phase. We explore omitted variables bias and instrumental variable estimation in robustness testing to alleviate endogeneity concerns. A mechanism analysis shows that credit risk, systematic risk, and idiosyncratic risk follow the corporate life pattern in accordance with loan spreads, suggesting that banks charge a premium to compensate for risk. Our results support the theoretical prediction that structural changes occur as firms evolve across the corporate life cycle.
KW - Bank loans
KW - Cost of debt
KW - Firm life cycle
KW - Risk
UR - http://www.scopus.com/inward/record.url?scp=85166902186&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2023.106971
DO - 10.1016/j.jbankfin.2023.106971
M3 - Article
AN - SCOPUS:85166902186
SN - 0378-4266
VL - 154
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
M1 - 106971
ER -