Corporate Diversification and the Cost of Debt: The Role of Segment Disclosures

53 Pages Posted: 18 Nov 2010 Last revised: 9 Dec 2016

Francesca Franco

London Business School

Oktay Urcan

University of Illinois at Urbana-Champaign

Florin P. Vasvari

London Business School

Date Written: September 17, 2015

Abstract

Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm’s default risk. In this paper, we endogenously estimate a firm’s segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors’ assessment of the co-insurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a sub-sample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information.

Keywords: Corporate Diversification, Segment Disclosure, Cost of Debt, Co-insurance

JEL Classification: G31, G32, M10, O16

Suggested Citation

Franco, Francesca and Urcan, Oktay and Vasvari, Florin P., Corporate Diversification and the Cost of Debt: The Role of Segment Disclosures (September 17, 2015). Available at SSRN: https://ssrn.com/abstract=1710562 or http://dx.doi.org/10.2139/ssrn.1710562

Francesca Franco

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 S. Sixth Street
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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