Bank Debt and Market Debt: An Empirical Analysis for Spanish Firms

Abstract

This paper examines the effect on the firm's banking cost of the issue of debt securities. We argue over the existence of a positive relationship between the issue of market debt and the reduction of firm's banking cost. This idea relies on three main arguments: i) banks can delegate to investors the supervision task, a feature that makes bank supervision less costly; ii) The issue of public debt increases firms' bargaining power in front of the banks, as the former can get funds through non-bank financing channels; iii) Banks with no prior information on the issuing firm may interpret the issue of debt securities as a positive signal of firm's quality. Additionally, we argue that the previous effects are less important for non-first issues and are sensible to the maturity of the bond issued. We empirically test these and other related theoretical results making use of a database of non-financial Spanish firms during the 1993-1998 period. We find empirical support for our theoretical contentions.

Keywords: Bank debt, Debt securities

JEL Classification: G32