Corporate Leverage, the Cost of Capital, and the Financial Crisis in Latin America

Using a quarterly dataset of 185 listed firms in six Latin American countries between 1993 and 2009 we find that leverage is positively related to tangibility, firm size and the market to book ratio, and negatively related to profitability. The average cost of debt is negatively related with size, tangibility, firm growth, the leverage ratio, and the ratio of long- to short-term debt and positively to profitability. We find that the recent international crisis did not have a significant impact on the set of firms in our sample, but affected the way in which leverage and the interest to debt ratio relate to firm fundamentals. In particular we find that the links between leverage, tangibility and profitability were strengthened, and that financial constraints were not increased during the crisis. The evidence is consistent with a flight-to-quality phenomenon in favor of big, listed firms