Abstract

http://ssrn.com/abstract=769765
 


 



The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy


Valeri V. Nikolaev


University of Chicago - Booth School of Business

Laurence Van Lent


Tilburg University - CentER for Economic Research and Dept. of Accounting

January 8, 2012

European Accounting Review, No. 4, pp. 677-724, 2005

Abstract:     
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm disclosure policy. We document how including a set of variables which theory suggests to be related with both cost-of-debt capital and disclosure and using fixed effects estimation in a panel dataset reduces the endogeneity bias and produces consistent results. This analysis reveals that the effect of disclosure policy on cost-of-debt capital is 200% higher than what is found in Ordinary Least Squares estimation. Finally, we provide direct evidence that disclosure is impacted by unobservable firm-specific factors that are also correlated with cost-of-capital.

Number of Pages in PDF File: 57

Keywords: Disclosure policy, cost-of-debt capital, endogeneity

JEL Classification: M41, M45, G12, G30, C23

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Date posted: August 5, 2005 ; Last revised: January 10, 2012

Suggested Citation

Nikolaev , Valeri V. and van Lent, Laurence, The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy (January 8, 2012). European Accounting Review, No. 4, pp. 677-724, 2005. Available at SSRN: http://ssrn.com/abstract=769765

Contact Information

Valeri V. Nikolaev (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 South Woodlawn Avenue
Chicago, IL 60637
United States
Laurence Van Lent
Tilburg University - CentER for Economic Research and Dept. of Accounting ( email )
Tilburg School of Economics and Management
P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 4668288 (Phone)
+31 13 4668001 (Fax)
HOME PAGE: http://www.tilburguniversity.nl/people/vanlent
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