Investigation of the external finance premium in the US corporate bond market

This thesis is concerned with understanding the influence of financial factors on the external finance premium in the US bond market during periods of economic downturns and upturns, where firm-groups are categorized according to their financial positions and the degree of informational asymmetry that they face. Our inquiry begins with a descriptive analysis of the databases employed in this study: the Datastream database and Fitch's database. In this chapter we provide summary statistics and graphs for the variables used in our regression analysis with a particular focus on financial factors. In addition, we describe the sample construction and the characteristics of the panel. We find that both the average credit spread and credit ratingf'are higher for small and young firms (constrained categories) compared to large and old firms (unconstrained categories). In addition, we show that balance sheet characteristics such as leverage and interest burden are higher, on average, for constrained firms, while operating margin and coverage ratio are higher for unconstrained firms. One line of enquiry provides an analysis of the external finance premium in the US bond market, exploiting firm heterogeneity to explain the variations in the premium across sectors and firms. The work has important implications for the accelerator model of credit since the US market is characterized as paper-based. Previous studies on the external finance premium have focused on the margin between internal finance and bank borrowing or equities, and relatively little attention has been given to corporate bonds. Our results suggest that firms with better financial health as measured by balance sheet indicators face a lower external finance premium supporting our hypothesis that the external finance premium is inversely related to the strength of the balance ·sheet. After separating firms into constrained and unconstrained categories, we find that firms that are constrained have higher premia than unconstrained firms. This implies that the premium on bond finance reflects the risk characteristics used by other financial markets to constrain the credit available to certain types (If firms. Finally, when we consider the recession/credit crunch episode in 2001-02 we find thlll the sensitivity of the premium varies between recessions/credit crunches and other rc:rlods, driven mainly by the interest burden, supporting our third hypothesis for variations in Bond premium for recessions.EThOS - Electronic Theses Online ServiceGBUnited Kingdo