Contracting Costs and the Window of Opportunity for Straight Debt Issues

Sudha Krishnaswami and Devrim Yaman
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Sudha Krishnaswami: University of New Orleans
Devrim Yaman: Western Michigan University

No 2005-11, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: We analyze whether fluctuation in economy-wide factors cause time-series variation in the contracting costs of moral hazard, adverse selection, and financial distress, and so create windows of opportunity for firms to issue debt. Using the announcement period abnormal returns as one measure of the overall contracting costs of debt issues, we specifically study whether economy-wide factors affect the impact of firm-specific measures of contracting costs on the abnormal returns. We find that debt issues are more costly in periods of higher interest rates and in industry downturns. When we partition the impact of each issue- and firm-specific measure of contracting costs across high and low levels of each economy-wide variable, we find that only the measures of agency cost become significant in general, but issue-specific measures of financial distress also become relevant in subsamples.

Keywords: Straight debt; Contracting costs; Moral hazard; Financial distress; Adverse selection (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2005
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
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