The Economic Consequences of Disclosure Quality under SFAS No. 131

SYNOPSIS We investigate the economic consequences of SFAS No. 131 by evaluating whether improved segment-disclosure quality is associated with the reduction of cost of debt (as measured by bond yield spread). Based on firms' compliance with the disclosure guidance by SFAS No. 131, we construct a score that measures segment-reporting quality. The results indicate that: (1) the level of a firm's compliance with SFAS No. 131 significantly and negatively relates to bond yield spreads, and (2) the time-series variation in the level of a firm's compliance with SFAS No. 131 associates significantly and positively with bond yield spreads. More specifically, the yield spreads decrease 17.065 bps per standard deviation increase in segment-reporting quality. Overall, our findings offer direct motivation for management to commit to high-quality segment reporting.

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Management Earnings Forecasts and the Cost of Debt

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x19887312 ◽

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.

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Executive Stock Ownership Guidelines and Debtholder Wealth

The Accounting Review ◽

10.2308/accr-52219 ◽

2018 ◽

Vol 94 (2) ◽

pp. 267-295 ◽

Cited By ~ 3

Author(s):

Jun-Koo Kang ◽

Limin Xu

Keyword(s):

Financial Reporting ◽

Stock Prices ◽

Reporting Quality ◽

Financial Reporting Quality ◽

Stock Ownership ◽

Yield Spreads ◽

Bond Yield ◽

Negative Effect ◽

Loan Spreads ◽

Instrumental Variables Approach

ABSTRACT We examine how the adoption of executive stock ownership guidelines affects debtholder wealth. We find that guideline adoption is associated with lower loan spreads, fewer collateral requirements, and fewer other restrictive covenants. The results are robust to using an instrumental variables approach. We further find that guideline adoption has a negative effect on bond yield spreads and that after the adoption, firms' risk-taking incentives are lower. These results suggest that guideline adoption benefits debtholders by lowering agency costs of debt. However, we also find that adoption of ownership guidelines is associated with a significant increase in stock prices, and that firms are more likely to increase financial reporting quality in the post-adoption period, indicating that guideline adoption incentivizes managers to improve firm fundamentals, benefiting both shareholders and debtholders. JEL Classifications: G21; G32; M12; M41.

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Beating Earnings Benchmarks and the Cost of Debt

The Accounting Review ◽

10.2308/accr.2008.83.2.377 ◽

2008 ◽

Vol 83 (2) ◽

pp. 377-416 ◽

Cited By ~ 165

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.

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Importance of Fiscal Fundamentals for Sovereign Risk Spread

Regaining Global Stability After the Financial Crisis - Advances in Finance, Accounting, and Economics ◽

10.4018/978-1-5225-4026-7.ch007 ◽

2018 ◽

pp. 127-146

Author(s):

Irena Szarowská

Keyword(s):

Generalized Method Of Moments ◽

Yield Spread ◽

Government Bond ◽

Sovereign Risk ◽

Fiscal Discipline ◽

Yield Spreads ◽

Risk Premiums ◽

Crisis Period ◽

Bond Yield ◽

Bond Risk

The chapter examines the importance of fiscal fundamentals for sovereign risk spread in the period of 1995-2015, and its goal is to test whether stronger fiscal discipline reduces sovereign risk premiums. The empirical evidence is based on unbalanced annual panel data of 15 EU countries (its time span is divided into a pre-crisis and a post-crisis period). The study applies the generalized method of moments. Evidence shows that before the financial crisis, investors generally ignored bond risk factors in individual countries, but that the spreads sharply diverged starting from the year 2008. The results confirm a statistically significant impact of fiscal fundamentals on government bond yield spread. The improvement of the governments' fiscal position reduces sovereign yield spread. In a post-crisis period, findings report the raising of the importance of fiscal variables for spread, and GDP growth became a major determinant of government bond yield spreads, followed by the budget balance and debt development.

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Consequences of CEO Overconfidence

Accounting and Finance Research ◽

10.5430/afr.v6n2p94 ◽

2017 ◽

Vol 6 (2) ◽

pp. 94 ◽

Cited By ~ 2

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.

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Over-Investment And The Cost Of Debt

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v30i6.8890 ◽

2014 ◽

Vol 30 (6) ◽

pp. 1739 ◽

Cited By ~ 1

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.

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

Journal of International Accounting Research ◽

10.2308/jiar-52358 ◽

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.

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