Corporate Diversification and the Cost of Debt
Author | : Francesca Franco |
Publisher | : |
Total Pages | : 53 |
Release | : 2015 |
ISBN-10 | : OCLC:1306285139 |
ISBN-13 | : |
Rating | : 4/5 (39 Downloads) |
Book excerpt: Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the co-insurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a sub-sample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information.