Basel IIIs Impact on Companies’ Cost of Debt: A Comparison between Rated and Unrated Firms- Evidence from the Nordics’

Abstract

The Basel recommendations are regulatory recommendations controlling financial stability by, for example, capital requirements. These capital requirements continue to increase, affecting not only banks but also individual companies. This thesis investigates how Basel III increased capital requirement impacts Nordic companies' cost of debt, potentially making it more expensive for firms to finance through lending. Smaller, non-rated firms are at the largest risk, which is why the influence of such firm characteristics is further analyzed. We use the Fixed Effects and the Difference-in-Difference models to test our research questions based on the Nordic region during 2010-2020. Although previous literature shows a link between increased capital requirements and the cost of debt, it cannot be proven in the scope of the thesis. Non-rated firms should be most affected by capital requirements; this can, however, not be proven in the thesis. The subject is proven to be relevant but difficult to research. It does, however, show a correlation between size and the effects of Basel III, and we can conclude that large firms are more affected by an increase in the cost of debt.