The Impact of Corporate Reputation on Cost of Debt: A Panel Data Analysis of Indian Listed Firms

Abstract

The study analyses the impact of financial reputation on the cost of debt financing for Indian companies. In doing so, panel regression analysis is performed using firm-specific data on 395 Indian listed firms covering 2002–2017. The paper uses market capitalization as a benchmark of financial reputation. For robustness check, excess of market value over book value is also used as a proxy of financial reputation. The study found that the reputation of a firm in financial markets plays a vital role in determining the cost of financing. The results provide evidence supporting a significant negative relationship between financial reputation and the cost of debt. The findings provide motivation for corporate managers to invest in reputation-building activities to reduce the cost of borrowing. The relevance of reputation in lowering the cost of debt capital has garnered limited attention, especially in emerging economies like India. This study is a preliminary attempt to link two strands of research in the Indian context: financial reputation and the cost of debt.

1. Introduction

Economic theory holds that in a repeated game, past actions and past behavior of a player serve as a basis to predict his/her future course of action (Anginer et al. 2011). Similarly, a company’s past behavior forms an impression of its quality and competence, which ultimately build a good reputation. The problem of information asymmetry assigns significance to reputation as a signal of strategic advantage (Roberts and Dowling 2002). Prior literature has posited numerous benefits of good reputation, among which the most widely acclaimed, enhanced financial performance, has been extensively explored and documented (Roberts and Dowling 2002; Eberl and Schwaiger 2005; Lee and Roh 2012; Hall and Lee 2014; Wang and Berens 2015; Razak et al. 2023). However, numerous other benefits also accrue to a reputed firm (Anginer et al. 2011; Pfister et al. 2020). For instance, Roberts and Dowling (2002) and Inglis et al. (2006) documented the attraction of high-caliber staff to reputed firms. The reputation of a firm not only attracts but also helps to maintain high-quality manpower, and thus reputed firms experience lower labor turnover (Eberl and Schwaiger 2005). Employees, investors and customers feel proud to be associated with reputed firms. Greater employee satisfaction, lower labor turnover, high morale (Eberl and Schwaiger 2005), greater customer satisfaction, repeated purchases by customers, willingness to pay price premiums (Rogerson 1983; Schwaiger 2004; Eberl and Schwaiger 2005), lower cost of capital (Beatty and Ritter 1986; Eberl and Schwaiger 2005; Roberts and Dowling 2002), and lower negotiating and transactional costs for suppliers (Podolny 1993) are among the documented benefits accruing from good corporate reputation.

The direct impact of a good corporate reputation on financial outcomes is difficult to decipher. Prolific research has examined the reputation–performance link (Roberts and Dowling 2002; Rose and Thomsen 2004; Eberl and Schwaiger 2005; Inglis et al. 2006; Anderson and Smith 2006; Sánchez and Sotorrío 2007; Zhang and Rezaee 2009; Stuebs and Sun 2010; Lee and Roh 2012; Alvarado-Vargas 2013; Wang and Berens 2015; Hall and Lee 2014; Tischer and Hildebrandt 2014; Tomak 2014; Raithel and Schwaiger 2015; Razak et al. 2023), but the findings are not completely consistent (de Quevedo Puente et al. 2011). Delgado-García et al. (2013) argued that a good reputation lowers risk, and Raithel et al. (2010) stated that a company with a strong reputation is not greatly affected by the financial crisis.

There is less empirical evidence supporting the assertion that reputed firms have better access to capital markets (Beatty and Ritter 1986). It is suggested that reputed companies enjoy a lower cost of debt for several reasons. First, market anomalies like information asymmetry and lower levels of transparency motivate stakeholders to surmise the quality of an ‘offer’ based on the quality of the ‘offeror’. The seller’s reputation imparts confidence to the buyer in negotiating a deal. Thus, company reputation is expected to lower information asymmetry in capital markets and, in turn, the cost of debt (Cao et al. 2015; Houqe et al. 2024). Second, a lack of familiarity with and newness of a product increase the bargaining power of the buyer, allowing him/her to negotiate a higher discount for such offerings. A rational investor would park his/her funds in a company of low repute only if it offers a higher return. Conversely, recognized stocks attract media attention and investor awareness, thereby expanding the investor base and lowering the cost of finance (Cao et al. 2015; Pfister et al. 2020; Maaloul et al. 2023). Third, a reputed company is expected to showcase quality in all aspects, whether in the form of product quality or good governance. It is assumed that a reputed company has a lower probability of failure in the future and a greater chance of surviving a crisis. Foreseeing the safety of investment, financers are even willing to lend to reputed companies at lower rates of interest. Banks, bondholders, debt holders and other financial institutions impose lower restrictions in their lending agreements with reputed companies.

Previous research has mainly focused on defining corporate reputation, developing a construct to capture reputation, and analyzing the impact of reputation on financial performance. Recent studies have begun exploring the link between corporate reputation and the cost of equity (Pfister et al. 2020) but not its link with the cost of financial debt. Financial reputation may have a relevant role in reducing a firm’s cost of debt (Anginer et al. 2011; Houqe et al. 2024). We argue that limited research has been conducted on examining the role of corporate reputation in debt financing among the five leading emerging countries—Brazil, Russia, India, China and South Africa—that constitute the BRICS block. These economies are predicted as the drivers of future economic developments across the globe and have attracted the attention of multinational corporations and international investments in both manufacturing and financial markets. The current research examines the impact of financial reputation (using market capitalization as its proxy) on the cost of debt in the Indian context over a long time frame (i.e., 15 years).

In addition to making a value-adding contribution to the BRICS nations-related debt financing literature, this study makes several contributions. First, the study contributes to the literature by identifying reputation among financial stakeholders as an important determinant of the cost of debt. Prior research has widely explored leverage, firm size, profitability, risk, and corporate quality disclosure as factors affecting the cost of debt (Sengupta 1998; Ojah and Manrique 2005), but only a few studies have examined the direct impact of a good reputation on the cost of debt financing (Houqe et al. 2024). Thereby, the current study makes an incremental contribution to the literature that explains the relationship between debt financing and corporate reputation. Second, no study has empirically examined the relevance of a good reputation in the debt market in the Indian context, which is idiosyncratic due to inefficient capital markets, lower transparency, a loose regulatory framework and lower investor protection. The paper selects data from the fast-emerging economy of India and analyses those financial data for a significant period of time—2002 to 2017. India during this period has implemented several changes to the corporation law such as governance reforms and changes to sustainability requirements. Therefore, the study of Indian data becomes value relevant. Third, research has widely explored the benefits of reputation in terms of improved financial performance. However, the literature empirically testing the economic benefit of a good reputation in terms of lowering the cost of debt is scant. The findings of the present study will be of interest to corporate managers by showing that reputation not only provides a competitive advantage but also paves the way for easy access to capital markets. The results imply that attaining and maintaining a good reputation not only improves financial performance in global markets but also provides a better position in financial markets. The study shows that efforts by managers to uphold a good financial reputation are eventually rewarded in the form of low-cost finance. Moreover, from a practical point of view, analyzing the link between financial reputation and the cost of debt will help managers understand the impact of reputation-building activities on a firm’s financing costs, with relevant implications for strategic planning. Finally, we argue that we use different measures of corporate reputation from a developing country perspective where no such indicative corporate reputation measures are available. We believe that our paper makes a reasonable contribution to corporate reputation measurement research as well.

The remainder of this paper is structured as follows. The concept of financial reputation is discussed in Section 2. Section 3 provides a review of the literature. The research methodology is outlined in Section 4. After describing the results and analysis in Section 5, Section 6 ends with a discussion and conclusions.

2. Concept of Financial Reputation

The most confounding aspect of corporate reputation is its measurement. Several studies have tried to capture reputation through survey-based techniques like the Fortune Most Admired Companies list; Harris–Fombrun Reputation Quotient (RQ); Merco Index of 100 most reputable firms in Spain, where the reputation of a company is measured along various aspects like product quality, quality of management, long-term investment value, responsible behavior and financial soundness. However, such qualitative measurement of reputation represents biased opinions rendering it unfit for scientific research (Tomak 2014). It is argued that a quantitative approach to measuring reputation is likely to provide a more rational and easy yardstick for stakeholders to assess the credibility of the company.

Two primary stakeholder groups look to businesses to fulfill their expectations: financial stakeholders and public stakeholders (Clarkson 1995). Investors and shareholders are covered under the spectrum of financial stakeholders (Clarkson 1995), who expect growth and focus on wealth maximization; by contrast, public stakeholders applaud social conformity by businesses. Based on these two stakeholder groups suggested by Clarkson (1995), Wang and Berens (2015) have identified two types of reputation: reputation among financial stakeholders and reputation among public stakeholders. Business activities that aim to improve the financial health of a company create a good reputation among shareholders and investors, i.e., financial stakeholders (Wang and Berens 2015), which can be denoted as ‘financial reputation’.

Financial reputation is a reflection of wealth creation and high firm value. If a company portrays high market value and gives good returns to shareholders, then it is expected to be admired by financial stakeholders, thereby enhancing its financial reputation. Black et al. (2000) found that a good reputation manifests itself through enhanced market value, thereby implying that improving the market value of a firm signals the firm’s possession of valuable intangible resources like reputation. Srivastava et al. (1997) concluded that shareholder wealth can be significantly improved if the company possesses a good reputation. Antunovich and Laster (1998) discovered that companies portraying high market capitalization earn better reputation ratings on Fortune’s “Most Admired Companies” list, and hence large-cap firms exhibit superior corporate reputation (Shefrin and Statman 1994, 1995; Antunovich and Laster 1998). The value of reputation has been gauged using the market value of equity by researchers like Black et al. (2000) and Srivastava et al. (1997), who have provided strong evidence for the use of market capitalization as an indicator and proxy of financial reputation.

The present study attempts to examine the value of a good reputation in capital markets to financial stakeholders, and thus it is prudent to analyze the impact of financial reputation (measured through market capitalization) on the cost of debt. Also, to check the sensitivity of the data and the results, excess market value over book value and shareholder return are used as a proxy of financial reputation. The study uses the signaling theory perspective to understand the relevance of corporate reputation in the explanation of the cost of the debt raised by the company, where high market capitalization and high return to shareholders indicating good corporate reputation is seen as a signal of good financial capabilities of the company to pay off its liabilities in the long term. In doing so, the impact of reputation in financial markets (measured through market capitalization, excess of market value over book value and shareholder return) on the cost of debt is empirically examined.

3. Literature Review and Hypothesis Development

Financing is a crucial decision. Debt holders are more apprehensive about lending compared to shareholders, as the former has no effective control over the use of resources (Piot and Missonier-Piera 2007). Unlike shareholders, debt holders do not have voting rights; hence they expect a higher return. Debt holders are willing to lend at lower rates only if they are assured of default risks (Piot and Missonier-Piera 2007). Market anomalies like information asymmetry and lower levels of transparency are ubiquitous, especially among developing nations, which increases the level of skepticism among lenders. Corporate managers endeavor to minimize information risk by sending various signals to lenders of finance, similar to the various certification mechanisms adopted by IPO contenders (An and Chan 2008).

A reputed firm has better access to financial markets as a good name in the market helps procure funds from the public at a lower cost (Beatty and Ritter 1986; Anginer et al. 2011; Pfister et al. 2020). A drastic decline in contracting costs is experienced as firm reputation increases (Podolny 1993; Roberts and Dowling 2002; Eberl and Schwaiger 2005). Highly admired firms are perceived as less risky (from the point of view of investors) and therefore attract financiers easily (Srivastava et al. 1997). Moreover, reputed firms experience lower monitoring costs because they are trusted by lenders. Podolny (1993) documented cost reductions (transactional, financial, advertising or employee costs) for a well-recognized business.

The importance of corporate reputation emerges due to information asymmetry (Diamond 1991; Milgrom and Roberts 1982). Anginer et al. (2011), Cao et al. (2015) and Pfister et al. (2020) assert that the role of reputation is more visible in markets that are opaque and where a high level of information asymmetry exists. Stakeholders rely on the reputation of the firm as a signal when they do not have access to tangible information regarding the firm (Anginer et al. 2011; Pfister et al. 2020; Maaloul et al. 2023; Núñez et al. 2023; Rong and Kim 2024; Kuzey et al. 2024). As such firm’s own reputation is argued to play a significant role in markets where greater levels of information asymmetry exist.

Corporate disclosures, financial performance, board size, corporate governance, corporate social responsibility, leverage, ownership pattern, and CEO turnover have all been documented as factors affecting the cost of debt (Sengupta 1998; Zhang 2009; Magnanelli and Izzo 2017; Maaloul et al. 2023; Núñez et al. 2023; Rong and Kim 2024; Kuzey et al. 2024). However, the literature documenting financial reputation as a factor in the cost of raising debt capital is limited. The seller’s reputation is of prime significance for consumers, creditors, suppliers of finance, analysts and various other stakeholders (Anginer et al. 2011). Empirical research has extensively explored the benefit of a good reputation in terms of improved financial numbers, but limited studies have gauged the benefit of reputation in terms of reduced financing costs (Anginer et al. 2011; Pfister et al. 2020). In his argument for reputation building, Diamond (1991) suggested that companies that build a good reputation for timely repayment have easy and cheap access to public finance.

Companies with a good reputation are expected to look after the interests of shareholders and thus are rewarded with lower cost of capital (Anginer et al. 2011). The rationale behind this negative relation could be attributed to the strong credibility built over time and increased investor confidence (Tanin et al. 2024). Not only this, but a reputed firm also has a lower risk of bankruptcy (Góis et al. 2020).

Scant literature has directly observed the impact of good corporate reputation on debt financing (Pfister et al. 2020); however, research widely documents reputation as a mediator between socially responsible companies and the cost of debt financing (Desender et al. 2019; Bacha et al. 2021). Rong and Kim (2024) concluded that companies with higher Environmental, Social and Governance (ESG) ratings build a good reputation in the market that ultimately lowers the cost of debt. High corporate social responsibility (CSR) engagement and enhanced ESG performance leads to reduced cost of borrowing (raising debt) as engaging in CSR or ESG builds reputation which acts as a mediator (Maaloul et al. 2023; Núñez et al. 2023; Rong and Kim 2024; Kuzey et al. 2024). Guo et al. (2024) concluded that firms with high ESG ratings benefit from lower costs and greater access to debt financing due to improved reputations.

Cao et al. (2015) identified a negative relation between corporate reputation and the cost of equity capital in US markets. They remarked that reputed firms have better access to capital markets. Pfister et al. (2020) confirmed the same relation for German firms in their research conducted from 2005 to 2011. Houqe et al. (2024) conducted global research on 20 nations and found that reputation lowers both the cost of equity and the cost of debt. Similar findings were obtained by Gomes (2000) and Siegel (2005). Cahan et al. (2014) reported that firms that invest in CSR initiatives earn a better reputation, which lowers the overall cost of capital. Researchers like Hyytinen and Pajarinen (2007), Anginer et al. (2011), Pfister and Schwaiger (2016) and Pfister et al. (2020) have concluded that there is a negative relation between corporate reputation and the cost of debt financing. In congruence with the reputation effect hypothesis, managers who are able to build good rapport in the market obtain easy access to outside finance (Nagasawa and Ito 2016). Magnanelli and Izzo (2017) found that greater investment in CSR activities improves reputation, which ultimately lowers the cost of debt financing. Although most empirical evidence has indicated a negative relation, Pfister (2014) while conducting research in the German context has called for more research in this domain.

The empirical evidence relating a firm’s own reputation to the cost of debt in emerging markets, specifically among the most prominent five emerging leaders—Brazil, Russia, India, China and South Africa—is scarce. Recent studies like Guo et al. (2024) posited that reputed firms have much lower costs and greater access to debt financing due to improved reputations. Zhao and Zhang (2024) confirmed that reputations built through robust ESG performance demonstrate a negative relation with debt financing. Wu (2011) empirically tested the relevance of brand reputation in raising finance and reputation as an important clue for investors that lowers the cost of equity finance. Li (2010) finds that reputation plays a crucial role in debt contracts among one of the emerging nations of the BRICS framework, i.e., China. Calegari et al. (2016) examined the impact of the reputation of 56 Brazilian companies over the period of 2008–2012 on the cost of capital and concluded a negative relation between the two.

Banerjee and Duflo (2000) delineated the significance of good reputation and indicated that reputation serves as an important aspect while contracting. Indian researchers have also demonstrated that reputed companies not only have better access to capital but also procure finance at a lower cost of capital.1 However, no study has examined the impact of financial reputation on the cost of debt finance in the Indian context using market capitalization as a proxy of reputation, and the current study is a modest attempt to fill this gap. Thus, the current study attempts to examine the role of corporate reputation as an important signal in the Indian capital market that intends to provide a better understanding of the entire BRICS block.

Performance and risk constitute a pivotal basis for decision-making by investors. It is imperative for lenders to evaluate the creditworthiness of the borrower. The past behavior and reputation of the borrowing firm improve the financier’s perception of the default risk of the firm. Reputed firms are generally considered less risky and attract more confidence and trust from the corporate audience. Himme and Fischer (2014) documented that corporate reputation offers unique information that supports high credit ratings from credit rating agencies, which signal the financial health of a firm and thus lower the cost of procuring funds. Reputed firms are expected to attract financiers at lower costs (Podolny 1993). Reputation serves as an assurance to the borrowers regarding fulfillment of the contractual obligations thereby postulating that reputed firms avail funds at a lower rate (Li 2010; Anginer et al. 2011; Pfister et al. 2020). Diamond (1991) claims that reputed firms have access to financial markets at a lower cost. It is hereby argued that firms with high financial reputations will be able to procure funds at a comparatively cheaper rate, thereby proclaiming a negative relation between reputation and the cost of debt. In light of this, the following hypothesis is framed:

H1. 

Financial reputation is negatively related to the cost of debt.

4. Research Methodology

To examine the impact of financial reputation on the cost of debt, the top 500 Indian companies constituting the Bombay Stock Exchange (BSE) 500 index are analyzed. “The BSE 500 Index represents approximately 93 percent of the total market capitalization on the BSE” (Kirca et al. 2016) and hence has been widely used in studies conducted in the Indian context. These companies also represent all major industries of the economy. The ACE equity database is used to extract information on the variables used in the study. The study encompasses the 15-year period from 1 April 2002 to 31 March 2017, to appraise the impact of financial reputation on the cost of debt financing. The final sample for this research includes 395 companies, and the variables are categorized into three sub-headings:

Dependent variable: The cost of debt is taken as the dependent variable. The methodology adopted by Pfister and Schwaiger (2016) is followed, and the cost of debt, denoted K_d, is measured as interest paid divided by total debt and is calculated individually for all 395 companies over a span of fifteen years:

$${\mathrm{K}}_{\mathrm{d}}={\displaystyle \frac{\mathrm{Interest} \mathrm{paid} \mathrm{in} \mathrm{a} \mathrm{year}}{\mathrm{Total} \mathrm{debt} \mathrm{at} \mathrm{the} \mathrm{end} \mathrm{of} \mathrm{year}}}$$

Independent variable: The aim of this study is to decipher the impact of financial reputation on the cost of debt; hence, financial reputation is taken as the independent variable. Market capitalization is taken as a proxy of financial reputation. For robustness check, excess of market value over book value and shareholder return is introduced as a proxy of financial reputation. Excess of market value over book value is ascertained as an excess of market value of equity over book value of equity. The market value of any company represents the recorded assets as well as the intangible resources possessed by it (Hall 1993). Therefore,

Firm’s Market Value = Assets − Liabilities + Intangible Assets

(1)

(Source: Black et al. 2000)

Since Assets − Liabilities = Book Value

(2)

(Lev 2003)

Substituting Equation (2) in Equation (1), results in Equation (3)

Market Value = Book Value + Intangible Assets

(3)

Intangible Assets = Market Value − Book Value

(4)

And since corporate reputation is considered as an intangible asset (Roberts and Dowling 2002); therefore, excess of market value over book value can be used as a proxy for corporate reputation.

Corporate reputation = Market Value − Book Value

(5)

The study uses shareholder return as a proxy of corporate reputation, which has been used by Mukasa et al. (2015); measured as changes in share price.

Control variables: To explicitly discern the impact of financial reputation on the cost of debt, certain control variables are introduced. Large firms tend to enjoy economies of scale, with more stability and less volatility in their earnings. This stability also lowers the chance of bankruptcy. Size reflects the borrowing capacity of a firm; a large firm has a large borrowing capacity, which entails more bargaining power over creditors. Large firms have easy access to capital markets and pay lower interest rates (Demsetz 1982), and thus the literature posits that firm size and the cost of debt are expected to be negatively related to each other (Sengupta 1998). Total assets are taken as an indicator of firm size in the current study.

A good liquidity position indicates a company’s capability to meet its short-term obligations. Sufficient liquid resources signal a firm’s capacity to bear short-term risk. Sánchez-Ballesta and García-Meca (2011) reported a negative relation between liquidity and the cost of debt financing. A company with a good liquidity position is expected to borrow at a lower rate of interest. The current ratio, i.e., the ratio of current assets to current liability, is taken as a measure of liquidity to control its impact on the cost of debt. A financially sound company is always preferred as an investment option by investors/lenders over a poorly performing company. Past profitability is a prime factor taken into consideration when lending to a firm. Profitable firms have easy access to financial markets and can borrow under better conditions, including even at lower rates. As a result, profitability is expected to have a negative impact on the cost of debt (Sengupta 1998). The ratio of earnings before interest and tax (EBIT) to total assets, i.e., return on assets (ROA), is taken as a measure of profitability to control its effect on the cost of debt (K_d).

Beta, a measure of market risk, captures the extent of volatility in the prices of securities of a company with respect to the market. A highly volatile company is perceived skeptically by shareholders and lenders, who in turn show a low level of willingness to finance such companies, raising the cost of finance. Consequently, beta is expected to have a positive impact on the cost of debt (Sengupta 1998). The ownership pattern also affects the perception of a firm. A company inviting institutional ownership indicates fairness in management, lowering the agency problem. Such companies are expected to borrow easily (Sánchez-Ballesta and García-Meca 2011), and financiers may even lend money to such companies at a lower rate. Thus, a negative relationship is expected between institutional shareholding and the cost of debt. The percentage of shares in institutional hands is taken as a proxy of ownership pattern in the present study. A highly leveraged firm has a greater dependence on borrowed funds to make up its capital structure. Highly geared firms are expected to raise funds at higher rates. Total debt to total equity is used as a measure of leverage. It is expected that the cost of debt increases with increasing leverage (Sengupta 1998). The interest coverage ratio is introduced as a control variable, as it is expected to negatively impact the cost of debt (Morales et al. 2010; Sánchez-Ballesta and García-Meca 2011).

Table 1. Description of the variables used in the study.

S. No.	Variable Name	Measurement and Symbol Used in the Study	Variable Type	Description
1.	Cost of debt	Kd = Interest/debt	Dependent variable	Interest paid during the year and total debt at the end of year extracted from ACE Equity.
2.	Financial reputation	Financial reputation	Independent variable	Market capitalization, excess of market value of equity over book value of equity and shareholder return are used as a proxy (extracted from ACE Equity).
3.	Financial performance	ROA	Control variable	Return on assets = Net profits after tax/assets (extracted from ACE Equity).
4.	Debt equity ratio	DER	Control variable	Debt/equity (extracted from ACE Equity).
5.	Current ratio	CR	Control variable	Current assets/current liabilities (extracted from ACE Equity).
6.	Total assets	TA	Control variable	Total Assets in Rs. Crore (extracted from ACE Equity).
7.	Ownership pattern	Institutional shareholding (ISH)	Control variable	Percent of shareholding in institutional hands (extracted from ACE Equity).
8.	Market Risk	Beta	Control variable	Volatility in securities of a company in relation to the market (extracted from ACE Equity).
9.	Interest coverage ratio	ICR = EBIT/Interest	Control variable	ICR expressed in percentage (extracted from ACE Equity).

Source: Author’s own compilation.

provides a brief description of the variables used in the study.

□

K_d = α_it + β₁ Financial reputation _it + β₂ Current Ratio _it + β₃ Total Assets _it + β₄ Beta _it + β₅ Institutional ownership _it + β₆ Debt Equity Ratio _it + β₇ Financial Performance _it + β₈ Interest Coverage Ratio _it.

5. Results and Analysis

The descriptive statistics of the sample companies are reported in

Table 2. Descriptive Statistics and Correlation Analysis.

Variable	Mean	S.D.	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
(1) Cost of Debt (Kd)	0.88	8.86	1
(2) Financial reputation	10,216.29	29,167.88	−0.01	1
(3) DER (in times)	1.26	19.00	−0.005	−0.0073	1
(4) ROA (in percent)	7.89	9.49	−0.001	0.08 ***	−0.05 ***	1
(5) TA (in Rs. Crore)	19,870.62	93,977.95	0.008	0.40 ***	0.005	−0.12 ***	1
(6) Beta	0.84	4.29	0.004	0.013	0.003	−0.01	0.02 *	1
(7) ISH (in percent)	19.44	15.37	−0.01	0.26 ***	0.005	−0.01	0.15 ***	0.05 ***	1
(8) CR (in times)	3.95	77.09	−0.003	−0.008	−0.002	−0.01	−0.009	−0.97 ***	−0.03 **	1
(9) ICR	127.86	674.56	−0.01	0.11 ***	−0.01	0.18 ***	−0.02 *	−0.008	0.008	−0.003	1

Note: *, ** and *** indicate statistical significance at the 10 percent, 5 percent and 1 percent levels, respectively. Source: Author’s own compilation.

. The solvency position of Indian companies is interpreted based on the debt–equity ratio, which has an average value of 1.26, indicating a satisfactory solvency position. Moreover, the liquidity position of Indian companies is quite good, with a mean current ratio of 3.95. The companies included in the sample do not appear to be risky investments, as the average values of both the debt–equity ratio and beta are not alarming. Beta, an indicator of market risk, is 0.84. Beta (0.84) is the coefficient representing the volatility compared to the market and measures the operating risk. It is expected to be positively correlated with the cost of debt (Sengupta 1998). Beta was amongst one of the important control variables, which measured the systematic risk associated with the market. We argue that the coefficient of beta is positively correlated with the cost of debt. The results also show a significant and positive effect (z 1.98) of the risk of the firm, expressed by the unlevered beta on the cost of debt, indicating that the more the specific risk of the firm, the higher its cost of borrowing. In the case of this sample for the current study, the average cost of debt is quite reasonable when seen with the implication of volatility of the sample firms.

The mean value of financial reputation measured through market capitalization is Rs. 10,216 crore. The average value of cost for raising debt capital is 0.88 which is less than 1%. We accept that the average cost of debt is low. However, it is important to note that the data analyzed comprise of 395 companies over a 15-year period, i.e., 5925 firm-level observations and there were few years (from 15 years for each firm) reported by companies as having no debt that resulted in the value of the cost of debt being ‘zero’ for those specific year(s), thereby dropping the average value of this measure.

The size of the company captured through total assets is Rs. 19,870 crore. Company size seems to be an essential indicator before borrowing funds, as large companies tend to have greater availability of resources, which act as a cushion for creditors. Lenders do give weight to a company’s financial position to ensure the safety of funds and regularity of interest payments. Indian companies taking advantage of debt financing show financial soundness, as the average level of ROA is 7.89 percent.

Ownership pattern is an important consideration when lending funds. Companies allowing institutional ownership are perceived favorably (Fombrun and Shanley 1990) and are expected to procure funds at lower rates of interest. The average level of institutional shareholding is 19.44 percent. The interest coverage ratio (ICR) reflects how well the creditors of the company are financially secured. The average ICR of Indian companies is 127.86, which indicates that companies earn sufficient profits to meet their interest obligations. The correlation analysis reveals that financial reputation and the cost of debt exhibit a negative relation, which implies that reputed firms procure funds at a lower cost from the debt market. Interestingly, large, financially sound companies permitting institutional ownership and portraying high ICR are perceived propitiously, as they all show significant positive correlations with financial reputation (p-value 0.00 < 0.01). Figure 1 shows the trend analysis of the mean value of the cost of debt raised by Indian companies. The cost of debt reached a very high value in 2008–2009, coinciding with the global financial crisis. This increase implies that Indian companies encountered problems in raising finance during this period and were able to procure funds at high cost.

This study intends to examine the impact of financial reputation on the cost of debt financing. The results of a panel regression are depicted in

Table 3. Panel regression results taking cost of debt as the dependent variable.

Variables	Model 1		Model 2		Model 3		Model 4
	Coefficient	Z Value (p-Value)	Coefficient	Z Value (p-Value)	Coefficient	Z Value (p-Value)	Coefficient	Z Value (p-Value)
Constant	−2.50	−11.52 (0.00)	−2.63	−11.58 (0.00)	−2.59	−11.53 (0.00)	−2.04985	−8.94 (0.00)
Debt equity ratio	0.0001	0.69 (0.49)	7.87 × 10−5	0.51 (0.61)	0.0001	0.67 (0.5)	5.57 × 10−5	0.31 (0.76)
Financial performance	0.006	1.57 (0.11)	0.007	1.67 * (0.09)	0.006	1.61 (0.11)	0.004745	1.16 (0.24)
Log(Total assets)	0.04	1.08 (0.27)	0.05	1.65 * (0.10)	0.04	1.4 (0.16)	−0.01594	−0.44 (0.65)
Beta	0.11	1.99 ** (0.04)	0.11	1.98 ** (0.04)	0.10	1.92 ** (0.04)	0.095007	1.74 * (0.08)
Institutional shareholding	0.002	0.67 (0.50)	0.002	0.71 (0.47)	0.004	1.14 (0.25)	0.002877	0.75 (0.45)
Current ratio	−0.01	−1.47 (0.14)	−0.01	−1.45 (0.14)	−0.002	−0.38 (0.70)	−0.00131	−0.15 (0.87)
ICR	−0.0007	−8.88 *** (0.00)	−0.0007	−8.75 *** (0.00)	−0.0007	−8.51 * (0.00)	−0.0007	−7.85 *** (0.00)
Financial reputation			−3.05 × 10−6	−1.91 ** (0.05)	−1.86 × 10−6	−1.11 (0.26)	−0.03913	−1.76 * (0.07)
R square	0.2295		0.2440		0.2109		0.1475
Wald chi2(7)	88.01 ***		91.53 ***		84.70 ***		70.16 ***
Prob > chi2	0.00		0.00		0.00		0.00

Note: *, ** and *** indicate statistical significance at the 10 percent, 5 percent and 1 percent levels, respectively. Source: Author’s own compilation.

. Model 1 shows the relation between various control variables and the cost of borrowing. Beta, an indicator of market risk, shows a significant positive impact on the cost of debt (p-value 0.04 < 0.05), which implies that companies that are perceived as more risky investments procure funds at a higher rate of interest. The ICR exhibits a significant negative impact on the cost of raising debt capital (p-value 0.00 < 0.01); the higher the ICR, the lower the cost of debt financing, as a higher ICR implies a company’s ability to bear its interest obligations. Model 1 captures 22.95 percent of the variation in the cost of debt.

The independent variable is introduced in model 2. Financial reputation exhibits a significant negative impact on the cost of debt (p-value 0.05), thereby implying that reputed firms are able to procure funds at lower costs. This finding is in line with Anginer et al. (2011) and Pfister et al. (2020), who documented that firm reputation acts as a signal to lenders, who feel secure in lending to reputed firms. Thus, reputed firms not only face lower hassles in procuring funds but are also able to raise funds at lower costs. Contrary to the findings of Morales et al. (2010), financial performance and firm size both generate a positive impact on the cost of debt that is significant at the 10 percent level. However, the relations of beta and ICR with the cost of debt are similar to those reported in model 1. The other control variables, i.e., the debt–equity ratio, ownership pattern, and current ratio, fail to generate a significant impact on the cost of debt. Model 2 explains 24.40 percent of the variation in the cost of debt.

As a part of the robustness check, another proxy of financial reputation, i.e., excess of market value over book value is introduced as an explanatory variable in model 3 instead of market capitalization. The relation between reputation and the cost of debt still holds negative, although it is found to be statistically insignificant. Further, shareholder return (as a proxy of financial reputation) is also introduced in Model 4, where the impact of corporate reputation on the cost of debt is found to be negative (p-value 0.07 < 0.10), thereby confirming the hypothesis that reputed firms face lower cost of debt financing.

6. Discussion and Conclusions

This study attempts to explore the relation between financial reputation and the cost of debt. Employing market capitalization as a proxy of financial reputation, the impact of financial reputation on the cost of debt for a sample of 395 Indian companies is explored over a period of 15 years. A robust inverse relation between reputation and cost of debt is observed, consistent with the findings of Hyytinen and Pajarinen (2007), Anginer et al. (2011), and Pfister and Schwaiger (2016). The results of the study show how financial reputation as a signal accounts for variation in the cost of debt among similar companies. It can be inferred that large-cap firms procure funds at lower cost. Black et al. (2000) documented that reputation is reflected through the enhanced market value of equity, and the present study concludes that this enhanced value in the market acts as a useful tool in lowering the cost of raising debt. Financial reputation is a good predictor of corporate progress, as the former contains information above and beyond what is conveyed by accounting variables and financial statements. Financial reputation is a pragmatic tool in capital markets, as firms with high reputations face less stringent covenants and possess more bargaining power (Anginer et al. 2011; Pfister et al. 2020; Maaloul et al. 2023).

We argue that despite the growing interest of academics and researchers in defining the impact of corporate reputation on corporate financial performance and an increasing amount of reputation-related research, there is limited research that has made efforts to study the effect of a company’s reputation on its borrowing costs. From this perspective, the current study contributes to the literature pertaining to the benefits of corporate reputation by upholding that a good reputation procures tangible benefits in the form of reduced cost of debt financing. Second, it contributes to the literature on determinants of the cost of debt by concluding that financial reputation is a crucial factor affecting the cost of borrowing. Third, the study attempts to examine the international robustness of the findings of Cao et al. (2015) and Anginer et al. (2011) by examining the relationship between financial reputation and the cost of debt in an emerging economy like India. It is important to observe the impact of a company’s reputation on the cost of debt amidst the high levels of information asymmetry prevalent in emerging economies, which are characterized by lower levels of transparency and high levels of uncertainty compared with developed nations.

The findings of the study carry significant implications for corporate managers in terms of investment in reputation-building activities, as a favorable reputation brings tangible benefits in the form of reduced cost of debt financing. As high credit ratings are inferred as a clue of safety that reduces ex ante uncertainty (An and Chan 2008), a good reputation is expected to serve as a signal of underlying quality to financiers, allowing them to lend on easy terms to reputed companies. However, this study is not without limitations. First, the study is a modest attempt to examine the impact of financial reputation on the cost of debt. Comprehensive research scrutinizing the impact of financial reputation on the cost of equity capital, cost of preference and overall cost of capital could provide better insights on the problem. Second, despite prolific research on financial reputation, there is no one standard measure to quantify it. Thus, the results may vary depending on the technique used to measure financial reputation even though we made an effort to use two alternative measures of financial reputation. Third, it is important to note that the sample companies did report on different dates. Very few companies in the sample may fall into this category. We submit that most of the companies use March 31 as their financial year in India, except for the foreign companies operating in India. Also, we further argue that different financial reporting dates may not have any impact on the results of the study. Future researchers should consider exploring the impact of corporate governance variables and industry sectors in understanding the cost of debt.