The Effect of Annual Report Readability on Cost of Debt
Posted: 15 Dec 2014
Date Written: December 14, 2014
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
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