Earnings Quality and the Cost of Debt of SMEs

Transaction-based lending and accrual quality

Managerial Finance ◽

10.1108/mf-01-2019-0012 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Stephen Gray ◽

Arjan Premti

Keyword(s):

Earnings Quality ◽

Financial Statements ◽

Financial Statement ◽

Cost Of Debt ◽

Accrual Quality ◽

Content Type ◽

Income Statement ◽

Prior Literature ◽

The Cost

PurposeThis study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.Design/methodology/approachTo measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.FindingsConsistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.Originality/valueThis paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

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THE EFFECT OF VOLUNTARY IFRS ADOPTION BY UNLISTED FI RMS ON EARNINGS QUALITY AND THE COST OF DEBT: EMPIRICAL EVIDENCE FROM KOREA

Journal of Business Economics and Management ◽

10.3846/16111699.2014.953991 ◽

2015 ◽

Vol 16 (5) ◽

pp. 931-948 ◽

Cited By ~ 4

Author(s):

Young Hwan Lee ◽

Sun A. Kang ◽

Sang Min Cho

Keyword(s):

Financial Reporting ◽

Earnings Quality ◽

Sample Selection ◽

Discretionary Accruals ◽

Cost Of Debt ◽

Cross Sectional ◽

Listed Firms ◽

Ifrs Adoption ◽

The Cost ◽

Unlisted Firms

The present study empirically examines how voluntary International Financial Reporting Standards (IFRS) adoption influences the earnings quality and the cost of debt of unlisted firms in Korea. Since 2011, when the adoption of IFRS by listed firms became mandatory, more unlisted firms have adopted IFRS voluntarily, improving the transparency and reliability of their accounting information. Using the sample of unlisted firms with 3year study period of preand post-IFRS adoption, we examine whether IFRS voluntary adopters show both lower discretionary accruals and the cost of debt than those of non adopters, and whether both discretionary accruals and the cost of debt of voluntary adopters decrease after IFRS adoption. We employ the Heckman's two stage approach in order to avoid sample selection bias and cross sectional pooled OLS regression with or without clustering test. We complimentary report the results from firm-fixed effect panel model to generalise the results. The results show that firms which adopt IFRS have a higher earnings quality and a lower cost of debt that those which do not. These findings suggest that when unlisted firms issue bonds and borrow money, IFRS adoption contributes to decreasing the cost of debt.

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Earnings quality and the cost of debt for SMEs under severe information asymmetry

Journal of Governance and Regulation ◽

10.22495/jgrv10i3art11 ◽

2021 ◽

Vol 10 (3) ◽

pp. 128-139

Author(s):

Pietro Fera ◽

Gianmarco Salzillo

Keyword(s):

Financial Reporting ◽

Private Information ◽

Global Financial Crisis ◽

Earnings Quality ◽

Cost Of Debt ◽

Negative Consequences ◽

Accounting Data ◽

Abnormal Accruals ◽

The Cost ◽

The Impact

The banking system has undergone substantial changes that boosted the relevance of transaction-lending technologies and the role of financial reporting in the bank-firm relationship. Due to the growing emphasis on accounting data, this study investigates the impact of earnings quality on the cost of debt for a sample of SMEs during the global financial crisis. Relying on a sample of Italian non-financial SMEs, empirical findings show a positive relationship between discretionary accruals and the cost of loans, highlighting the negative consequences of low-quality earnings. Further analysis reveals the different impacts that negative and positive abnormal accruals can have on the cost of debt: low values of the former can convey private information and positively affect the response variable, which shows a positive and quadratic relationship with the latter. These findings confirm the increasing importance of hard information in credit markets and point out the significant impact of the quality of the borrowers’ earnings on the cost of debts. However, the distinctiveness of the study from the previous literature relies on evidence that, even during a credit crunch period, financial institutions weigh up the expected return from lending transactions, relying on both the sign and the magnitude of discretionary abnormal accruals as a vehicle to get firms’ private information.

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Earnings quality and cost of debt: evidence from Portuguese private companies

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-08-2014-0065 ◽

2016 ◽

Vol 14 (2) ◽

pp. 178-197 ◽

Cited By ~ 11

Author(s):

Cecília Rendeiro Carmo ◽

José António Cardoso Moreira ◽

Maria Cristina Souto Miranda

Keyword(s):

Financial Institutions ◽

Earnings Quality ◽

Listed Companies ◽

Cost Of Debt ◽

Company Size ◽

Private Companies ◽

Content Type ◽

Debt Level ◽

The Cost ◽

The Relationship

Purpose The purpose of this paper is to test the relationship between earnings quality and the cost of debt for private companies in a “code-law” country (Ball et al., 2000). The analysis controls for company size, debt level and audited information. Design/methodology/approach The paper uses the ordinary least squares regression technique to test the relationship between earnings quality and the cost of debt. Findings The collected empirical evidence shows a negative relationship between earnings quality and the cost of debt and controls for company size and debt level. Such a relationship is stronger when the company information is audited. Research limitations/implications Similar to other studies, this paper has two main limitations. There was no access to specific data on the interest rates charged on bank loans, implying that the cost of debt is measured by the ratio of the interest expense to interest-bearing debt. The research only uses earnings quality measures based on abnormal accruals. Practical implications The collected evidence suggests that earnings quality have economic consequences for private companies by affecting their cost of debt, similar to those observed in previous studies for listed companies. This evidence can be seen as an incentive for private companies to increase their financial information quality. For debt providers, namely, financial institutions, the findings can be of interest to help them price properly the loans they make available to private companies. In general, the findings of this research can be of interest for company managers and financial institutions in countries with an institutional environment similar to that of Portugal. Originality/value The relation between earnings quality and the cost of debt has been so far studied for listed companies in “common law” countries. This paper provides new and complementary evidence about such relation for private companies and “code-law” country.

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CSR DISCLOSURE AND COST OF CAPITAL : THE MEDIATING ROLE OF EARNINGS QUALITY

JURNAL INFORMASI, PERPAJAKAN, AKUNTANSI, DAN KEUANGAN PUBLIK ◽

10.25105/jipak.v16i2.9152 ◽

2021 ◽

Vol 16 (2) ◽

pp. 223

Author(s):

Chaerunnisa . ◽

Tri Lestari ◽

Windu Mulyasari

Keyword(s):

Cost Of Capital ◽

Stock Exchange ◽

Earnings Quality ◽

Linear Regression Analysis ◽

Cost Of Debt ◽

Global Reporting Initiative ◽

Cost Of Equity ◽

Mediating Role ◽

Csr Disclosure ◽

The Cost

<p><em>This study aims to analyze the effect of CSR disclosure on the cost of capital with earnings quality as mediating variable. CSR disclosure was measured by Global Reporting Initiative (GRI) Standards. The cost of capital was measured by the cost of equity and the cost of debt. Meanwhile, earnings quality was measured by absolute abnormal accruals. The population of this research is mining companies listed on the Indonesia Stock Exchange period 2017-2019. Based on the purposive sampling method, the samples chosen are 32 companies with a total sample of 96 data. This study used multiple linear regression analysis using SPSS 25 version software and path analysis using the Sobel online calculator. This study showed that CSR disclosure has a direct negative effect on the cost of equity but does not affect the cost of debt. Firms with better CSR disclosure have better earnings quality. Earnings quality does not affect both costs of capital proxies. Earnings quality does not have a mediating role in the effect of CSR disclosure on both costs of capital proxies. </em></p>

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Does earnings quality affect the cost of debt in a banking system? Evidence from French listed companies

Journal of General Management ◽

10.1177/0306307020916296 ◽

2020 ◽

Vol 45 (4) ◽

pp. 183-191

Author(s):

Asma Houcine ◽

Walid Houcine

Keyword(s):

Earnings Quality ◽

Estimation Error ◽

Banking System ◽

Cash Flows ◽

Economic Consequences ◽

Cost Of Debt ◽

Financial Reports ◽

The Cost ◽

Future Cash Flows

This study examines the effect of earnings quality on the cost of debt, for a sample of French listed firms from 2005 to 2015. Using accruals quality (AQ) as a proxy for the quality of financial reports, the results obtained confirm the research hypothesis formulated, showing that the quality of financial reports is negatively related to firms’ interest cost. The results also support that the innate component of AQ has a greater impact on the cost of debt than the discretionary component. The findings of this study may be of interest to managers by providing evidence on the economic consequences of improved earnings on the cost of debt and the factors that determine debt pricing in making decisions to minimize it. The results of this article are also important for creditors, that is, banks, showing that earnings are important in predicting firms’ reimbursement capacity (i.e. future cash flows) and that less estimation error in accruals improves the ability of earnings to predict future cash flows.

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