Cost of Debt and Corporate Profitability

Abstract

This paper examines the relationship between the cost of debt and corporate profitability using a sample of 3,556 Italian unlisted firms between 2007 and 2011. On the basis of the logistic regression model, we find that the cost of debt, measured by the interest expense to financial debt ratio, is negatively correlated to various proxies of firm profitability. These findings are consistent with previous research on the relevance of indirect costs of corporate distress. However, although the analysis found evidence that unprofitable firms are highly leveraged in accordance with the Pecking order theory, we also observed that the cost of debt for the firms included in the sample is inversely dependent on the amount of financial debt.