Do Creditors Prefer Smooth Earnings? Evidence from European Private Firms

2015 ◽  
Vol 14 (2) ◽  
pp. 151-180 ◽  
Author(s):  
Joachim Gassen ◽  
Rolf Uwe Fülbier
Keyword(s):  
Data Availability ◽  
Cost Of Debt ◽  
Private Firms ◽  
Relative Importance ◽  
Cross Sectional ◽  
Debt Contracting ◽  
Country Level ◽  
The Cost ◽  
Earnings Smoothness ◽  
Jel Classifications

ABSTRACT We investigate the interplay between creditor financing and the smoothness of earnings reported by European private firms, and document how heterogeneous debt-contracting infrastructures across Europe moderate this relation. We expect the smoothness of earnings to be positively related to the relative importance of credit providers in our setting. More importantly, we predict this relation to be more pronounced in regimes with higher bankruptcy and contract enforcement costs. Finally, we hypothesize that earnings smoothness is negatively related to the cost of debt of our sample firms. Our large-sample empirical evidence confirms our expectations. While the cross-sectional nature of our setting limits our potential to address endogeneity concerns and, thus, caution is required when interpreting our findings in a causal way, they are consistent with the accounting of European private firms being shaped by creditor incentives and with this link being moderated by the country-level efficiency of the debt-contracting infrastructure. JEL Classifications: M41; G14; F42. Data Availability: All data used in this study are publicly available from the sources identified in the text.

R&D and the Rising Foreign Profitability of U.S. Multinational Corporations

2019 ◽  
Vol 95 (3) ◽  
pp. 177-204 ◽  
Author(s):  
Lisa De Simone ◽  
Jingjing (Jing) Huang ◽  
Linda K. Krull
Keyword(s):  
Multinational Corporations ◽  
Economic Activity ◽  
Transfer Pricing ◽  
Tax Incentives ◽  
Relative Importance ◽  
Cross Sectional ◽  
Profit Margins ◽  
The Cost ◽  
Pricing Risk ◽  
Jel Classifications

ABSTRACT We investigate how R&D contributes to rising foreign profitability in U.S. multinational corporations through wage and tax incentives. Our results suggest that wage savings increase foreign profit margins derived from foreign R&D, while tax incentives increase foreign profit margins derived from domestic R&D. By exploring their relative importance, we find that wage savings are more important than tax incentives in explaining foreign profit margins when the wage discount substantially exceeds tax incentives, and vice versa. Cross-sectional tests show that firms respond more to foreign R&D wage savings when they have access to local human talent, but less as the cost of conducting foreign R&D increases. Firms respond less to tax incentives to shift income derived from domestic R&D as transfer pricing risk increases. Our evidence sheds light on the importance of R&D-related income shifting that potentially separates the location of economic activity from the location of income. JEL Classifications: H25; H26.

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.

THE EFFECTS OF ANALYST FORECAST PROPERTIES AND COUNTRY-LEVEL INSTITUTIONS ON THE COST OF DEBT

2015 ◽  
Vol 38 (4) ◽  
pp. 461-493 ◽  
Author(s):  
Narjess Boubakri ◽  
Sadok El Ghoul ◽  
Omrane Guedhami ◽  
Anis Samet
Keyword(s):  
Cost Of Debt ◽  
Analyst Forecast ◽  
Country Level ◽  
The Cost

Social Media and Voluntary Nonfinancial Disclosure: Evidence from Twitter Presence and Corporate Political Disclosure

2018 ◽  
Vol 33 (2) ◽  
pp. 99-128 ◽  
Author(s):  
Lijun (Gillian) Lei ◽  
Yutao Li ◽  
Yan Luo
Keyword(s):  
Social Media ◽  
Econometric Model ◽  
Data Availability ◽  
Political Contributions ◽  
Cross Sectional ◽  
Political Activities ◽  
Social Media Platforms ◽  
Sectional Analysis ◽  
Jel Classifications ◽  
Nonfinancial Disclosure

ABSTRACT This study uses a sample of 1,316 firm-year observations of S&P 500 companies (2012–2016) to investigate whether and how social media (i.e., Twitter) affects firms' voluntary nonfinancial disclosure (i.e., corporate political disclosure). Our results show that Twitter-adopting firms are generally more transparent in their disclosure of corporate political contributions and of related policies and board oversight. Moreover, firms with more Twitter followers and firms whose corporate political activities are targeted in more Twitter messages are more transparent in such disclosures. Our cross-sectional analysis suggests that this effect is stronger for firms whose stakeholders are more active on Twitter and firms that are less visible or more reputable. Our results remain robust to different econometric model specifications and controlling for alternative social media platforms. Taken together, our findings suggest that social media (i.e., Twitter) presence exerts pressure on firms' voluntary nonfinancial disclosure practices (i.e., corporate political disclosure). JEL Classifications: G38; M41; M48. Data Availability: Data are available from the sources indicated in the text.

The 2008–2009 global financial crisis and the cost of debt capital among SMEs: Swedish evidence

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Darush Yazdanfar ◽  
Peter Öhman
Keyword(s):  
Financial Crisis ◽  
Large Scale ◽  
Global Financial Crisis ◽  
Dynamic Panel Data ◽  
Cost Of Debt ◽  
Cross Sectional ◽  
Content Type ◽  
Debt Capital ◽  
Using Data ◽  
The Cost

PurposeThe main purpose of this study is to describe and analyse the relationship between the 2008–2009 global financial crisis and small and medium-sized enterprises' cost of debt capital.Design/methodology/approachStatistical methods, including multiple OLS and dynamic panel data, were used to analyse a longitudinal cross-sectional panel dataset of 3865 Swedish SMEs operating in five industry sectors over the 2008–2015 period.FindingsThe results suggest that the cost of debt was influenced by the financial crisis and another macroeconomic factor, i.e. the interbank interest rate, and by firm-specific factors such as firm size and lagged cost of debt.Originality/valueTo the authors' best knowledge, this is one of few studies to examine the cost of debt among SMEs during the crisis and post-crisis periods using data from a large-scale, longitudinal, cross-sectional database.

Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research

2010 ◽  
Vol 85 (2) ◽  
pp. 483-512 ◽  
Author(s):  
Ian D. Gow ◽  
Gaizka Ormazabal ◽  
Daniel J. Taylor
Keyword(s):  
Time Series ◽  
Equity Capital ◽  
Cost Of Debt ◽  
Test Statistics ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Cross Sectional ◽  
Accounting Research ◽  
The Cost ◽  
Series Dependence

ABSTRACT: We review and evaluate the methods commonly used in the accounting literature to correct for cross-sectional and time-series dependence. While much of the accounting literature studies settings in which variables are cross-sectionally and serially correlated, we find that the extant methods are not robust to both forms of dependence. Contrary to claims in the literature, we find that the Z2 statistic and Newey-West corrected Fama-MacBeth standard errors do not correct for both cross-sectional and time-series dependence. We show that extant methods produce misspecified test statistics in common accounting research settings, and that correcting for both forms of dependence substantially alters inferences reported in the literature. Specifically, several findings in the implied cost of equity capital literature, the cost of debt literature, and the conservatism literature appear not to be robust to the use of well-specified test statistics.

scholarly journals Quantifying the Cost of Risk in Consumption

2010 ◽  
Vol 10 (1) ◽  
Author(s):  
Mario Tirelli ◽  
Sergio Turner
Keyword(s):  
Panel Data ◽  
Approximation Method ◽  
Additional Benefit ◽  
Relative Importance ◽  
Total Consumption ◽  
Cross Sectional ◽  
Total Cost ◽  
The Cost ◽  
General Preferences ◽  
Consumption Profile

Fixing a risky intertemporal, interagent consumption profile, its total cost is the total willingness to pay for smoothing everyone's consumption. It decomposes into a micro cost that captures the inefficiency in the cross-sectional distribution of total consumption, risky as it is, and a macro cost that captures the additional benefit of eliminating the risk in total consumption, once efficiently redistributed.We consider the risk that a household experiences income mobility and the consequent consumption mobility. U.S. panel data estimates a consumption profile for which we compute the costs. The total cost is 9-18% of total initial consumption for CRRA parameters 1.25-3.5. Of this, 80-90% is the micro cost and only 10-20% is the macro cost. The magnitude of these results, and in particular the relative importance of the micro cost, is in line with previous empirical evidence.Motivated by this evidence we develop the theory of micro cost. Moreover, because the micro cost does not admit a closed form, for general preferences, we lay out an approximation method.

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.

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.

Capital Structure, Earnings Management, and Sarbanes-Oxley: Evidence from Canadian and U.S. Firms

2013 ◽  
Vol 27 (2) ◽  
pp. 301-318 ◽  
Author(s):  
Kelly E. Carter
Keyword(s):  
Capital Structure ◽  
Earnings Management ◽  
Data Availability ◽  
Cost Of Debt ◽  
Equity Financing ◽  
Percentage Points ◽  
Sarbanes Oxley ◽  
The U.S ◽  
Jel Classifications

SYNOPSIS I examine Sarbanes-Oxley's (SOX) effect on capital structure. I find that SOX is associated with higher long-term debt ratios, as firms listed in the U.S. raise their long-term debt ratios by 2 to 3 percentage points. This finding is consistent with the idea that, although the reduction in information asymmetry associated with SOX could prompt managers to increase equity financing, debt is still safer and less costly than equity in the SOX era. Further analysis shows that the increase in debt occurs in the two quarters prior to SOX, suggesting that firms anticipate a higher cost of debt after SOX and acquire debt while it is relatively cheap. Also, firms that heavily (lightly) manage earnings prior to SOX use less (more) debt after SOX. This result is consistent with the view that firms that aggressively manage earnings before SOX reveal intrinsically weaker earnings after SOX, casting doubt on those firms' ability to repay debt and relegating those firms to issue equity for financing purposes. JEL Classifications: G32; G38. Data Availability: Data available upon request.

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