A Study on Determinants of the Cost of Debt in Public Institutions

Abstract

This study examines the factors affecting the cost of debt in public institutions from the perspective of the risk premium paid to investors when issuing public finance bonds. The results of comparing the sample of public finance bonds for four years and six months with the sample of corporate bonds issued by private companies during the same period are as follows. First, compared with corporate bonds, financial and operating risks have relatively weaker effects on the yield spread in public finance bonds. This is because investors in the bond market underestimate the default risk on public finance bonds because of the positive effects of government guarantees, which is why they consider the issuer's financial risks to be less important. Second, as the term and credit spreads increase, the issuance yield spread of public finance bonds increases. In addition, unlike corporate bonds, only public finance bond samples have significant relationships between supply/demand variables and issuance yield spread. The results demonstrate that the market risk factor is the main factor affecting the cost of debt, rather than the firm-specific risk factor of the issuing agency.