The Cost of Financing Debt and Equity Issues in the Canadian Forest Products Industry Available to Purchase

In recent years the Canadian forest products industry has undergone significant restructuring and it may soon enter a phase of consolidation. The financing of such activity is explored in this paper by assessing the determinants of the compensation paid to underwriters of new debt and equity issues by Canadian forest products companies in the 1985-94 period. Previous studies have investigated underwriter compensation in terms of the influences on the cost of certification and marketing services provided by underwriters to firms that seek to raise new external capital. We suggest that various issue and issuer characteristics also influence investor response to new issues of Canadian forest sector companies. We found that the larger the issue, the less the uncertainty associated with the company, and the smaller the underwriting syndicate, the lower is the up-front cost of issuing new debt and equity. We also found that companies pay different amounts depending on the type of issue. Finally, we found support for the hypothesis that the stated purpose of an issue affects its financing cost. In particular, companies that intend to use the proceeds from an issue for acquisition/expansion pay higher financing costs. These results suggest a number of considerations for lowering the financing cost of restructuring and consolidation.