scholarly journals Over-Investment And The Cost Of Debt

2014 ◽  
Vol 30 (6) ◽  
pp. 1739 ◽  
Author(s):  
Jungeun Cho ◽  
Hyunjung Choi
Keyword(s):  
Financial Reporting ◽  
Positive Association ◽  
Cost Of Debt ◽  
Negative Consequences ◽  
Effective Measure ◽  
Yield Spreads ◽  
Risk Premiums ◽  
Bond Yield ◽  
Financing Costs ◽  
The Cost

In this paper, we examine the association between over-investment and the cost of debt. Using bond yield spreads as a proxy for the cost of debt, we find that over-investment is positively associated with bond yield spreads. This suggests that when firms engage in over-investment, the quality of their financial reporting is lower and business risk is higher. Therefore, investors demand higher risk premiums because of their inability to evaluate firms financial position and future operating performance efficiently. We also find that the positive association between over-investment and bond yield spreads is weaker for firms in which managers and foreign shareholders own a high percentage of shares. This same association is stronger for firms in which the largest shareholders own a large proportion of the company. These results imply variation in the effect of over-investment on bond yield spreads according to the ownership structure. Our findings provide empirical evidence that over-investment brings about negative consequences for firms by increasing their external financing costs. This paper contributes to extant literature by using bond yield spreads as a proxy for the cost of debt rather than using credit ratings and interest expenses. Bond yield spreads can be regarded as a more effective measure for the cost of debt because this measure reflects more timely and direct information about decision-making processes of financial market participants when corporate bonds are issued.

The Impact of Eliminating the 20-F Reconciliation on the Cost of Debt: An Exploratory Study

2019 ◽  
Vol 18 (1) ◽  
pp. 47-70
Author(s):  
Lucy Huajing Chen ◽  
Saiying Deng ◽  
Parveen P. Gupta ◽  
Heibatollah Sami
Keyword(s):  
Financial Reporting ◽  
Positive Association ◽  
Cost Of Debt ◽  
Yield Spread ◽  
Cross Sectional ◽  
Country Level ◽  
Bond Yield ◽  
The Cost ◽  
The Impact ◽  
The U.S

ABSTRACT In 2007, the U.S. Securities and Exchange Commission voted to eliminate the 20-F reconciliation requirement for foreign issuers listing their stocks or bonds in the U.S. capital markets and preparing their financial statements under International Financial Reporting Standards (IFRS). Distinct from prior research focusing on the equity market, we investigate the impact of eliminating the 20-F reconciliation on the cost of debt in the U.S. listed foreign bond market. Employing a difference-in-differences approach, we document that bond yield spread increases for foreign IFRS bond issuers after the elimination of 20-F reconciliation. The results suggest that bondholders, on average, view the elimination of 20-F reconciliation as an information loss. Cross-sectional analyses reveal that the positive association between the elimination of 20-F reconciliation and bond yield spread is more pronounced for firms with greater stock return volatility, lower institutional ownership, weaker reporting incentives, and higher country-level investor protection. JEL Classifications: M41; G15; G18.

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

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.

scholarly journals Consequences of CEO Overconfidence

2017 ◽  
Vol 6 (2) ◽  
pp. 94 ◽  
Author(s):  
Qiuhong Zhao ◽  
Dave A. Ziebart
Keyword(s):  
Financial Market ◽  
Earnings Forecasts ◽  
Cost Of Debt ◽  
Risk Exposure ◽  
Management Earnings Forecasts ◽  
Yield Spreads ◽  
Bond Yield ◽  
Ceo Selection ◽  
The Cost ◽  
The Impact

We test the impact of CEO overconfidence on the cost of debt and the impact of SOX on overconfidence via CEO selection. Our CEO overconfidence measure is based on the degree of optimism in management earnings forecasts, and the measure for the cost of debt is bond yield spreads. Our evidence supports that the market discounts CEO overconfidence by increasing the cost of borrowing. Moreover, we find that the financial market also incorporates past CEO overconfidence into bond pricing. We document that the board prefers to appoint a more rational CEO over an overconfident CEO. Our findings are consistent with Banerjee et al.’s (2015) argument that an independent board mitigates the costs of CEO overconfidence in terms of investment and risk exposure.

scholarly journals Media Coverage and the Cost of Debt

2019 ◽  
Vol 55 (2) ◽  
pp. 429-471 ◽  
Author(s):  
Haoyu Gao ◽  
Junbo Wang ◽  
Yanchu Wang ◽  
Chunchi Wu ◽  
Xi Dong
Keyword(s):  
Information Asymmetry ◽  
Media Coverage ◽  
Default Risk ◽  
Cost Of Debt ◽  
Yield Spreads ◽  
Negatively Associated ◽  
Economic Mechanisms ◽  
The Cost ◽  
Yield Determinants ◽  
Firm Attributes

This paper investigates the relation between media coverage and offering yield spreads using a comprehensive dataset of 5,338 industrial bonds issued from 1990 to 2011. We find that media coverage is negatively associated with firms’ cost of debt. This association is robust to controlling for standard yield determinants, different model specifications, and endogeneity. We identify 4 economic channels through which media coverage influences the cost of debt: Information asymmetry, governance, liquidity, and default risk. Importantly, media coverage has an independent influence beyond the effects of these economic mechanisms and is not a proxy for other firm attributes.

XBRL adoption and cost of debt

2015 ◽  
Vol 23 (2) ◽  
pp. 199-216 ◽  
Author(s):  
Syou-Ching Lai ◽  
Yuh-Shin Lin ◽  
Yi-Hung Lin ◽  
Hua-Wei Huang
Keyword(s):  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Cost Of Debt ◽  
Content Type ◽  
Public Firms ◽  
Top Managers ◽  
Weak Evidence ◽  
The Usa ◽  
Mandatory Adoption ◽  
The Cost

Purpose – This paper aims to examine the relation between the cost of debt and the adoption of eXtensible Business Reporting Language (XBRL). Design/methodology/approach – The financial data are obtained from the Compustat database. Regression analysis is used to examine the research hypotheses. Findings – The authors find that both voluntary and mandatory adoption of XBRL lead to a lower cost of debt for firms, with weak evidence that this reduction is greater for the former than the latter. Research limitations/implications – The findings support the policy of the USA Securities and Exchange Commission (SEC), and thus this paper recommends that adoption of XBRL should be mandatory for all public firms. Practical implications – The findings encourage top managers to develop their firms’ XBRL systems. Originality/value – The results support the SEC’s policy of mandatory XBRL adoption, as it can lead to greater financial reporting transparency and mitigate information asymmetry between management and bondholders.

Management Earnings Forecasts and the Cost of Debt

2019 ◽  
pp. 0148558X1988731
Author(s):  
Norio Kitagawa ◽  
Akinobu Shuto
Keyword(s):  
Default Risk ◽  
Lower Cost ◽  
Earnings Forecasts ◽  
Bond Market ◽  
Cost Of Debt ◽  
Yield Spread ◽  
Management Earnings Forecasts ◽  
Bond Yield ◽  
Earnings Benchmarks ◽  
The Cost

Prior studies have indicated that earnings are useful for bond market investors and that beating earnings benchmarks is related to a firm’s lower cost of debt. This study examines whether management earnings forecasts are related to a firm’s cost of debt. Our results indicate that (a) positive forecast innovations (i.e., forecasted increases in earnings) are related to a firm’s lower bond yield spread after controlling for the effect of other earnings benchmarks and (b) the negative association between positive forecast innovations and bond yield spread is weaker for firms with high default risk than for those with low default risk. The results suggest that management earnings forecasts are useful for investors in the Japanese bond market and are consistent with the findings in the equity market. However, the usefulness of management earnings forecasts in the bond market depends on a firm’s level of default risk. Our results suggest that bond investors discount the management earnings forecasts of firms with high default risk because such forecasts are more likely to have an optimistic bias.

FINANCIAL REPORTING RELEASE 48 AND BOND YIELD SPREADS

2017 ◽  
Vol 17 (2) ◽  
pp. 77-88
Author(s):  
Chen-Miao Lin ◽  
Charles Hodges
Keyword(s):  
Financial Reporting ◽  
Yield Spreads ◽  
Bond Yield

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.

Accounting for Biological Assets and the Cost of Debt

2015 ◽  
Vol 15 (2) ◽  
pp. 31-47 ◽  
Author(s):  
Abbie Daly ◽  
Hollis A. Skaife
Keyword(s):  
Lower Cost ◽  
Positive Association ◽  
Fair Value ◽  
Financial Statement ◽  
Cost Of Debt ◽  
Historical Cost ◽  
Country Study ◽  
Cross Country ◽  
One Year ◽  
The Cost

ABSTRACT Firms engaged in agriculture generate revenue from biological assets that manifest in the cultivation of bearer fruits and nuts, the tilling of crops, and the production of livestock and forestry. We investigate whether firms' cost of debt is associated with the measurement method they use to account for their biological assets. We find that the cost of debt is higher for firms using the fair value method of accounting for their biological assets relative to firms using historical cost. However, the positive association between the cost of debt and fair value is driven by firms that transform bearer plants, i.e., living plants that ultimately bear produce for more than one year. We also document that fair value combined with auditor attested IFRS use results in a lower cost of debt for firms transforming other types of biological assets. Our cross-country study focuses on a class of assets previously unexplored, and contributes to the literature that examines the consequences of fair value accounting for financial statement users. JEL Classifications: G39; H25; M41.

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

2015 ◽  
Vol 16 (5) ◽  
pp. 931-948 ◽  
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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