Is the cost of debt capital higher for younger firms?

While the negative qualitative relation between the cost of debt capital and firm age is rather well established in the financial economics literature, there are few, if any, quantitative estimates available of the magnitude of the age effect. This study analyses this effect by utilizing a large dataset of Finnish firms. The data consists of 56432 firms and 119259 observations from 2000-2002. Our fixed-effect estimations show that for small businesses, the effect of getting older on the cost of debt finance is economically large: The semi-elasticity of the cost of debt capital is from 3 to 4.5 percent. That is, the cost of debt capital is about 30-45% higher for a new firm than it is for the same firm when it reaches middle-age (i.e., when it is about ten years old). We also find that the cost of debt capital is higher for young firms even after (changes in) observable creditworthiness, as measured by a commercial credit score, is controlled for. We conclude that the return to maturing one more year is not negligible in the market for small business (debt) finance.