scholarly journals Do audited firms have a lower cost of debt?

2022 ◽  
Author(s):  
Asif M. Huq ◽  
Fredrik Hartwig ◽  
Niklas Rudholm
Keyword(s):  
Financial Statements ◽  
Cost Of Debt ◽  
Sources Of Information ◽  
Private Debt ◽  
High Exposure ◽  
History Of ◽  
Debt Market ◽  
Instrumental Variable Method ◽  
Alternative Sources ◽  
The Cost

AbstractThe purpose of this study is to investigate if audited financial statements add value for firms in the private debt market. Using an instrumental variable method, we find that firms with audited financial statements, on average, save 0.47 percentage points on the cost of debt compared to firms with unaudited financial statements. We also find that using the big, well-known auditing firms does not yield any additional cost of debt benefits. Lastly, we investigate if there are industries where alternative sources of information make auditing less valuable in reducing the cost of debt. Here, we find that auditing is less important in lowering cost in one industry, agriculture, where one lender has a 74% market share and a 100-year history of lending to firms within that industry. As such, it seems that lenders having high exposure to a certain industry might act as an alternative to auditing in reducing the information asymmetry between the firm and the lender.

Does opening high-speed railways affect the cost of debt financing? A quasi-natural experiment

2020 ◽  
Vol 10 (4) ◽  
pp. 473-496
Author(s):  
Hongling Guo ◽  
Keping Wu
Keyword(s):  
High Speed ◽  
Geographical Location ◽  
Debt Financing ◽  
Cost Of Debt ◽  
High Speed Railway ◽  
Content Type ◽  
Financing Cost ◽  
Debt Market ◽  
The Cost ◽  
The Impact

PurposeThis study aims to investigate how opening high-speed railways affects the cost of debt financing based on China's background.Design/methodology/approachUsing panel data on Chinese listed firms from 2008 to 2017, this study constructs a quasi-natural experiment and adopts a difference-in-difference model with multiple time periods to empirically examine the relation between the high-speed railway openings and debt financing cost.FindingsOur results show that opening high-speed railways reduces the cost of debt financing, and this negative correlation is more significant in non-state firms, firms with weaker internal control, and firms that hire non-Big Four auditors. Besides, we explore the impact mechanisms and find that opening high-speed railways improves analyst attention, institutional investor participation, and information disclosure quality, which in turn lowers the cost of debt financing.Research limitations/implicationsThe results imply that the opening of high-speed railways helps to alleviate the information asymmetry and adverse selection between firms and creditors and ultimately reduces the cost of corporate debt financing.Practical implicationsThis paper can inform firms and stakeholders about the impact of opening high-speed railways on debt financing cost: it improves the information environment, reduces the geographical location restrictions of debt financing, ensures the reasonable pricing of corporate debt, and thus promotes the healthy and sound development of the debt market.Originality/valueThis paper provides theoretical support and empirical evidence for the impact of infrastructure construction on the information environment of the debt market in China, which enriches the research on the “high-speed railway economy.” In addition, as an exogenous event, the opening of high-speed railways instantly shortens the time distance between firms and external stakeholders, which gives us a natural environment to conduct empirical research, thus providing a new perspective for financial research on firms' geographical location.

scholarly journals The Effect Of IFRS Non-Audit Consulting Services On Cost Of Debt: Evidence From Korea

2015 ◽  
Vol 31 (5) ◽  
pp. 1889
Author(s):  
Seung Uk Choi ◽  
Woo Jae Lee
Keyword(s):  
Interest Rate ◽  
Financial Reporting ◽  
Credit Rating ◽  
Financial Statements ◽  
Cost Of Debt ◽  
Reporting Standards ◽  
Listed Firms ◽  
Financial Reporting Standards ◽  
Consulting Services ◽  
The Cost

Korean listed firms have been required to disclose their financial statements based on the International Financial Reporting Standards (IFRS) since 2011. Using pre- and post-IFRS reporting periods, we investigate the relation between IFRS non-audit consulting services provided by incumbent auditor and the cost of debt of its client for firms in the Korean Stock Market. We find evidence that IFRS non-audit consulting services are related to the decrease in cost of debt only during the post-IFRS period. In particular, receiving non-audit consulting services is positively associated with a clients bond credit rating and negatively associated with interest rate. The result generally holds when we use alternative proxies of IFRS non-audit consulting services. Finally, our results are robust to potential endogeneity issues in selecting non-audit services.

scholarly journals Audit quality and the cost of debt in private firms: evidence from the Brazilian sugarcane industry

2021 ◽  
pp. 1-16
Author(s):  
Aviner Augusto Silva Manoel ◽  
Marcelo Botelho da Costa Moraes ◽  
David Ferreira Lopes Santos ◽  
Gabriel Pereira Pündrich
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Economic Benefits ◽  
Cost Of Debt ◽  
Private Firms ◽  
Financial Reports ◽  
Public Companies ◽  
Big 4 ◽  
The Cost ◽  
Sugarcane Industry

Evidence is mixed regarding the economic benefits achieved by companies hiring large firms to audit their financial statements. The studies approaching this theme concentrate mostly on public companies in developed markets, while the effect on private firms in emerging markets is still an open question. This research explores this gap by analyzing whether private firms in the Brazilian sugarcane industry audited by a Big 4 have a lower cost of debt than those audited by a non-Big 4. For that, a unique, hand-collected, dataset was used. This paper contributes to the literature by providing evidence of the role of audit institutions in an environment lacking studies on private firms’ financial reports, especially in emerging economies. The empirical analysis does not indicate that the cost of debt is negatively influenced by the verification of financial statements by a high-quality auditor. Banks and credit unions, as the primary funding sources of the industry, condition the cost of debt reduction to the levels of tangibility, leverage, and profitability. We also contribute to the literature by demonstrating that lenders may have other soft information sources, obtained through banking relationship, which may substitute higher-quality auditor. The results hold after robustness checks and endogeneity concerns.

Earthly Reward to the Religious: Religiosity and the Costs of Public and Private Debt

2018 ◽  
Vol 53 (5) ◽  
pp. 2131-2160 ◽  
Author(s):  
Feng Jiang ◽  
Kose John ◽  
C. Wei Li ◽  
Yiming Qian
Keyword(s):  
Corporate Culture ◽  
Credit Ratings ◽  
Explanatory Power ◽  
Bank Loans ◽  
Soft Information ◽  
Cost Of Debt ◽  
Private Debt ◽  
Public And Private ◽  
The Cost ◽  
The Impact

We document that a firm’s culture, specifically, its religiosity, affects its cost of debt. Firms in higher-religiosity counties have higher credit ratings and lower debt costs. The impact of religiosity is stronger for firms with greater information asymmetry and during recessions. Further, religiosity has additional explanatory power for the cost of bank loans (but not the cost of public bonds) beyond its impact through ratings. This supports the argument that banks have superior abilities in pricing soft information, such as corporate culture. Finally, the impact of religiosity is stronger when the lender is a small bank.

Transaction-based lending and accrual quality

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.

Beating Earnings Benchmarks and the Cost of Debt

2008 ◽  
Vol 83 (2) ◽  
pp. 377-416 ◽  
Author(s):  
John (Xuefeng) Jiang
Keyword(s):  
Default Risk ◽  
Lower Cost ◽  
Cost Of Debt ◽  
Bond Markets ◽  
Yield Spread ◽  
Bond Yield ◽  
Earnings Benchmarks ◽  
Debt Market ◽  
The Cost ◽  
Firm Default

Prior research documents that firms tend to beat three earnings benchmarks—zero earnings, last year's earnings, and analyst's forecasted earnings—and that there are both equity market and compensation-related benefits associated with beating these benchmarks. This study investigates whether and under what conditions beating these three earnings benchmarks reduces a firm's cost of debt. I use two proxies for a firm's cost of debt: credit ratings and initial bond yield spread. Results suggest that firms beating earnings benchmarks have a higher probability of rating upgrades and a smaller initial bond yield spread. Additional analyses indicate that (1) the benefits of beating earnings benchmarks are more pronounced for firms with high default risk; (2) beating the zero earnings benchmark generally provides the biggest reward in terms of a lower cost of debt; and (3) the reduction in the cost of debt is attenuated but does not disappear for firms beating benchmarks through earnings management. In sum, results suggest that there are benefits associated with beating earnings benchmarks in the debt market. These benefits vary by benchmark, firm default risk, and method utilized to beat the benchmark. Among other implications, this evidence suggests that the relative importance of specific benchmarks differs across the equity and bond markets.

scholarly journals ANALISIS PENGARUH TAX AVOIDANCE TERHADAP COST OF DEBT PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BEI SELAMA PERIODE 2010–2014

MODUS ◽  
2016 ◽  
Vol 28 (2) ◽  
pp. 137
Author(s):  
Janice Ekasanti Santosa ◽  
Heni Kurniawan
Keyword(s):  
Stock Exchange ◽  
Tax Avoidance ◽  
Financial Statements ◽  
Cost Of Debt ◽  
Efficient Management ◽  
Tax Savings ◽  
The Cost ◽  
Positive Effect ◽  
Observation Period ◽  
Tax Expense

Cost of debt borne by the company set by creditors based on how managementmanages the company. Effective and efficient management related to the way themanagement to increase revenue and suppress the load to obtain the maximum profit. Oneof the expense to be managed is the tax expense. Tax savings that they comply with the provisions of taxation known as tax avoidance. This study aims to reexamine the influenceof tax avoidance on the cost of debt on companies listed in the Indonesia Stock Exchange(BEI) in the period 2010-2014.This study uses financial statements of companies listed on the Stock Exchangeduring the period 2010-2014. Samples were selected using purposive sampling methodand obtained a sample of 49 companies with five years observation period, and the totalobserved data is of 245 data. Hypothesis testing is done by a simple linear regression.Based on the analysis, the result that tax avoidance positive effect on the cost of debton companies listed in the Indonesia Stock Exchange (BEI) in the period 2010-2014.Creditors consider tax avoidance as practices that involve risks thereby increasing the costof debt.Keywords: tax expense, cost of debt, tax avoidance, creditors, tax savings, manufacturingcompanies listed on the Stock Exchange.

scholarly journals Earnings Transparency, Cost of Debt and Cost of Equity: A Cross-Country Examination

2020 ◽  
Vol 13 (10) ◽  
pp. 115
Author(s):  
Eduardo Flores ◽  
Joelson Oliveira Sampaio ◽  
Aziz Xavier Beiruth ◽  
Aldy Fernandes da Silva
Keyword(s):  
Financial Statements ◽  
Cost Of Debt ◽  
Decision Making Process ◽  
Cost Of Equity ◽  
Main Hypothesis ◽  
Prior Literature ◽  
Cross Country ◽  
Developed Stock Markets ◽  
The Cost ◽  
Debt Holders

This study evaluates the effect of earnings transparency on the cost of debt (Ki) and cost of equity (Ke). Previous literature has demonstrated that earnings transparency can reduce the Ke, especially in very well-developed stock markets. However, our main hypothesis is that this finding does not necessarily remain the same when considering the Ki. More specifically, this is because investors and creditors have different interests, concerns, and views about financial statements and accounting procedures. Using two proxies of earnings transparency, our findings support this conjecture, indicating that while an increase in earnings transparency reduces the Ke, this relationship does not keep that same impact on Ki. This study has implications for standard setters, debt holders and companies regarding the changes stemming from IFRS convergence, contributing to the prior literature which indicate that creditors and investors need different kind of information due to the distinct decision-making process.

Do Unverifiable Disclosures Matter? Evidence from Peer-to-Peer Lending

2012 ◽  
Vol 87 (4) ◽  
pp. 1385-1413 ◽  
Author(s):  
Jeremy Michels
Keyword(s):  
Peer To Peer ◽  
Data Availability ◽  
Cost Of Debt ◽  
Sources Of Information ◽  
Market Inefficiencies ◽  
Point Reduction ◽  
The Subject ◽  
Peer Lending ◽  
The Cost

ABSTRACT The role of disclosure in attenuating market inefficiencies has been the subject of extensive research. While costless, voluntary, and unverifiable disclosures are unlikely to be credible sources of information, prior research demonstrates that individuals' decisions can be influenced by uninformative content. I use a unique dataset from a peer-to-peer lending website, Prosper.com, to demonstrate an economically large effect of voluntary, unverifiable disclosures in reducing the cost of debt. My results show an additional unverifiable disclosure is associated with a 1.27 percentage point reduction in interest rate and an 8 percent increase in bidding activity. Data Availability: All data are publicly available from sources identified in the paper.

Examining the entry of Walmart into South Africa: A stakeholder management perspective

2019 ◽  
Vol 38 (2) ◽  
pp. 78-89
Author(s):  
Tembinkosi Bonakele ◽  
Dave Beaty ◽  
Fathima Rasool ◽  
Drikus Kriek
Keyword(s):  
South Africa ◽  
Trade Unions ◽  
Negative Impact ◽  
Stakeholder Management ◽  
Sources Of Information ◽  
Key Stakeholders ◽  
Management Perspective ◽  
Labour Standards ◽  
History Of ◽  
Primary Focus

The recent entry of the US multinational Walmart into South Africa has proved to be a source of controversy. Key stakeholders in South Africa objected to the merger and attempted to block it unless certain conditions were met. The aim of this study was to examine the controversy and the conditions surrounding the merger. The research employed a qualitative archival analysis to examine publicly available sources of information with regard to the merger. The findings revealed key stakeholders’ concerns that Walmart’s entry would lead to an increase in imports which would displace local producers, increase unemployment, marginalise trade unions and lower labour standards unless certain conditions were met. The results also revealed problems relating to the firm’s primary focus on “business” while neglecting “public interest” issues, naively relying on their “local retailer” to manage key stakeholders, and assuming that their perceived controversial reputation regarding treatment of trade unions and their views about unemployment as well as the controversies surrounding their history of entry into other global markets would not have the major negative impact it did on stakeholders in South Africa.

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