Research in Finance Series: Government Policy in Financial Markets
“Deregulation and the Cost of Public Debt”
by Professor Paul Malatesta,
Foster Business School, University of Washington
We assess the impact ofderegulation on firms’ costs of issuing public debt. Using a difference-in-difference estimation approach, we find robust evidence that the at-issue yield spreads decline in the aftermath of deregulation. The declines are both economically and statistically significant. We also find that the impacts of deregulation on bond issue costs are long-lasting and show up in different phases of the deregulated period. These impacts exhibit substantial cross-sectional variations. Long maturity bonds, those with speculative credit ratings, and those with large principal amounts experience much greater yield reductions after deregulation. Moreover, firms with low profitability, low operating efficiency, small product market shares, high financial leverage, and facing severe financial distress and financing constraints also experience larger reductions in bond issue costs from deregulation.
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