We examine whether the existence of a bank/firm relationship lowers the cost of public debt financing. Using a sample of first public straight debt offers, we test the cross-monitoring effect of bank debt and Diamond's (1991, Journal of Political Economy, 99, 689–721) reputation-building argument. We find that the existence of bank debt lowers the at-issue yield spreads for first public straight bond offers by about 68 basis points, on average. Consistent with Diamond's reputation-building argument, we document that firm reputation is negatively related to the at-issue yield spread for initial public debt offers.
Journal of Financial Economics – Elsevier
Published: Mar 1, 1999
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