Firm net worth, external finance premia and monitoring cost: Estimates based on firm-level data

,, Sarah Lein and ,

No 17508, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Based on a large panel of balance sheets and income statements of Swiss nonfinancial firms from 1998 to 2016, we estimate the sensitivity of the cost of external finance to firm net worth using exogenous variation in net worth. We find that firm net worth is inversely related to the external finance premium, consistent with models featuring financial frictions as in Bernanke, Gertler, and Gilchrist (1999). Through the lens of their costly state verification setup, we provide a range for the monitoring cost implied by our estimated sensitivity of the cost of external finance to net worth. Our implied estimate of the monitoring cost ranges between 15 and 20 percent, consistent with an economically significant financial friction.

Keywords: External finance premium; Net worth; Firm-level balance sheet data; Costly state verification (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 (search for similar items in EconPapers)
Date: 2022-07
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Working Paper: Firm net worth, external finance premia and monitoring cost - estimates based on firm-level data (2022)
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