The cost of debt for Yankee and domestic bonds

Abstract

This paper compares the cost of debt for corporate bonds issued by foreign firms (Yankee bonds) and by U.S. firms (domestic bonds) in the U.S. market. By using a sample of 2445 Yankee bond from 68 countries for the 1991–2014 period, I find that better country-level governance offsets the impact of asymmetric information on the cost of debt. Yankee bonds domiciled in countries with higher protection and law enforcement have a significantly lower cost of debt than comparable domestic bonds. On the other hand, for foreign firms domiciled in countries with worse control on self-dealing, the cost of debt is higher than that for domestic firms due to higher asymmetric information. Further findings suggest that the yield spread is significantly reduced for Yankee bonds that are from countries with better country-level governance.