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The Effect of Annual Report Readability on Cost of Debt

Posted: 15 Dec 2014  

Xiaohua Fang

Georgia State University - J. Mack Robinson College of Business

Yutao Li

University of Lethbridge

Baohua Xin

University of Toronto - Rotman School of Management

Wenjun Zhang

Dalhousie University

Date Written: December 14, 2014

Abstract

This study examines whether and how borrowing firms’ financial statement readability affects the contracting features of syndicated loans. Using a sample of loans issued by U.S. public firms in the syndicated loan market over the period 1994-2007, we find strong evidence that firms producing more difficult-to-read annual reports incur higher cost of debt proxied by private loan yield spread. Our results are consistent with the view that annual report readability reduces information processing costs to creditors. In addition, the association between readability and cost of borrowing is more pronounced for firms with weak governance and firms with low relationship intensity.

Keywords: debt contracting, loan syndication, financial statement readability

JEL Classification: G12, G14, M41

Suggested Citation

Fang, Xiaohua and Li, Yutao and Xin, Baohua and Zhang, Wenjun, The Effect of Annual Report Readability on Cost of Debt (December 14, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2538251 or http://dx.doi.org/10.2139/ssrn.2538251

Xiaohua Fang

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7235 (Phone)

Yutao Li

University of Lethbridge ( email )

Lethbridge, Alberta T1K5E8
Canada

Baohua Xin

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Wenjun Zhang (Contact Author)

Dalhousie University ( email )

Halifax
Canada

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