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Agency costs of Debt in good times

20 November 2019 at 11:30 AM - 1:00 PM

Room 305A, Campus on Viale Romania, 32

Speaker: Michela Altieri, Vrije Universiteit Amsterdam

Abstract:

I exploit the introduction of a segment reporting reform to investigate the economic effect of the agency costs of debt in conglomerate firms. A difference-in-difference estimation reveals that firms reported as single-segment (standalone) before the reform and as multisegment (conglomerates) after the reform suffer a 10% increase in the yield spreads compared to the true standalone firms. The treatment effect is concentrated on firms with a high volatility in the growth opportunities and a low coinsurance across segment units. This is consistent with bondholders being aware of a moral hazard problem arising out of inefficient internal capital markets and adjusting the cost of debt accordingly. I show that the agency costs of debt affect the (non-monotonic) relationship between a conglomerate firm’s cost of debt and the correlation of its segment cash flows. I estimate those costs in times of growing capital markets, when the coinsurance across units is less valuable to investors