Impacts of firm life cycle on bond ratings and yields

Abstract

We examine how firm life cycle affects ratings and costs of debt for public offers. We find that ratings for issuers in the introduction and decline stages are lower than those for growth and mature issuers. A similar U-shaped relation between life stage and yield spread, after controlling for credit rating, indicates that life stage affects cost of debt through multiple channels. Costs of debt are lower for growth and mature issuers than for introduction and decline issuers. Analyses of high-yield bonds and term to maturity suggest that the adverse effect on costs of debt for introduction and decline firms is associated with their elevated riskiness and greater information asymmetry.