Chapter 16: The role of financial reporting in debt markets

Abstract

This chapter explores the role of financial reporting in debt financing. Lenders rely on borrowers' financial disclosures to assess their creditworthiness, establish loan terms, and monitor contractual compliance. Properties of borrowers' financial reporting affect borrowers' eligibility to receive credit, the choice between different debt types, debt pricing, covenant structures, collateral requirements and subsequent debt renegotiations. High-quality financial information typically enhances a borrower's credibility and thus leads to more favorable debt market outcomes. Credit rating agencies, which are external parties that evaluate borrowers' creditworthiness, also rely on financial reporting information. By highlighting the influence of financial reporting on lenders and credit rating agencies, this chapter provides insights into how financial reporting information affects debt markets.

Keywords: Debt financing, credit risk assessment, loan contracting, corporate bonds, credit rating agencies, financial reporting quality