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An Empirical Analysis of the Cost of Borrowing

Author

Listed:
  • Miguel Faria-e-Castro
  • Samuel Jordan-Wood
  • Julian Kozlowski
Abstract
We examine borrowing costs for firms using a security-level database with bank loans and corporate bonds issued by U.S. companies. We find significant within-firm dispersion in borrowing rates, even after controlling for security and firm observable characteristics. Obtaining a bank loan is 132 basis points cheaper than issuing a bond, after accounting for observable factors. Changes in borrowing costs have persistent negative impacts on firm-level outcomes, such as investment and borrowing, and these effects vary across sectors. These findings contribute to our understanding of borrowing costs and their implications for corporate policies and performance.

Suggested Citation

  • Miguel Faria-e-Castro & Samuel Jordan-Wood & Julian Kozlowski, 2024. "An Empirical Analysis of the Cost of Borrowing," Working Papers 2024-016, Federal Reserve Bank of St. Louis, revised 15 Jul 2024.
    • Handle: RePEc:fip:fedlwp:98542
    DOI: 10.20955/wp.2024.016
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    References listed on IDEAS

    as
    1. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
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    5. Michael Schwert, 2020. "Does Borrowing from Banks Cost More than Borrowing from the Market?," Journal of Finance, American Finance Association, vol. 75(2), pages 905-947, April.
    6. Cecilia R. Caglio & R. Matthew Darst & Ṣebnem Kalemli-Özcan, 2021. "Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms," NBER Working Papers 28685, National Bureau of Economic Research, Inc.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    credit spreads; bonds; loans; macro-finance;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G01 - Financial Economics - - General - - - Financial Crises
    • H0 - Public Economics - - General

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