The Impact of Narrative Disclosure Readability on Bond Ratings and the Cost of Debt Capital

45 Pages Posted: 8 Nov 2016 Last revised: 26 Nov 2016

See all articles by Samuel B. Bonsall

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Date Written: October 21, 2016

Abstract

Prior research on the determinants of credit ratings has focused primarily on rating agencies’ use of quantitative accounting information, but the impact of financial disclosures, particularly textual attributes, on the bond rating process has gone relatively unexplored. This study examines the potential impact of the financial disclosure narrative on various bond market outcomes. We find that less readable financial disclosures are associated with less favorable ratings (higher default risk), greater bond rating agency disagreement, and a higher cost of debt capital. To address the potential confound that our results may be influenced by some underlying firm characteristic (e.g., firm complexity), we take advantage of a regulatory intervention provided by the 1998 Plain English Mandate requiring a subset of firms to exogenously improve the readability of their filings. Using a difference-in-differences design, we find that the firms required to improve the readability of their filings experience more favorable ratings (lower default risk), lower bond rating disagreement, and lower cost of debt capital. Collectively, our evidence suggests that textual financial disclosure attributes appear to not only influence bond market intermediaries’ opinions, but also firms’ cost of debt capital.

Keywords: Readability, Plain English, Reporting Complexity, Rating Agencies, Disagreement, Cost of Debt Capital

JEL Classification: G24, M40, M48

Suggested Citation

Bonsall, Samuel B. and Miller, Brian P., The Impact of Narrative Disclosure Readability on Bond Ratings and the Cost of Debt Capital (October 21, 2016). Review of Accounting Studies, Forthcoming; Kelley School of Business Research Paper No. 16-82. Available at SSRN: https://ssrn.com/abstract=2865761 or http://dx.doi.org/10.2139/ssrn.2865761

Samuel B. Bonsall (Contact Author)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
547
Abstract Views
1,573
rank
48,734
PlumX Metrics