Operating leverage and the cost of debt in European agri-food firms

Abstract

Aim of study: To analyse the effect that operating leverage exerts on the cost of debt of agri-food firms in Europe, both in isolation and indirectly through its other risk factors.Area of study: We used panel data made up of 18,360 European firms from 2009 to 2016 (146,880 observations).Material and methods: The data were extracted from the ORBIS database and EUROSTAT. The econometric approach was estimated by the Generalized Method of Moments.Main results: The results obtained confirm that operating leverage or cost structure, in addition to affecting the cost of debt, also affects the relationship between that cost and other sources of risk. More specifically, indebtedness, size, specificity and age all affect the cost of debt to a greater or lesser extent, depending on the level of operating leverage of the company.Research highlights: The main contribution was the study of the cost of external financing as a function of the cost structure, because this directly influences the competitiveness of companies in a key sector of the European economy. We also demonstrated the country effect, taking into account the different policies and practices regarding the assumption of risk by firms. The agri-food sector has been subject to special aid programs of research & development distributed unevenly across countries. If we add to this the national subsidy programs, the level of indebtedness is not a clear determinant of the cost of debt. The main determinant of that cost is the operating leverage.

Corporate Sustainable Development, Corporate Environmental Performance and Cost of Debt

“…Some studies show that the scale of corporate assets and profits, organizational structure, asset liability maturity structure, financial leverage, discretionary cash flow, and other factors significantly affect the cost of corporate debt [1,29,30]. Based on the research of scholars on financing costs, previous studies have focused more on the role and impact of enterprises' own behavior on financing costs.…”

“…We use return on total assets to represent the company s profitability. The lower the required rate of return, the less dependent the firm is on outside capital to grow reproduction [29]. Consequently, we set ROA as a control variable.…”