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ABSTRACT
The cost of debt provides signals not only on firm financing but also on managerial ability to increase the bottom line. Thus, good quality financial reporting practice enable firms to optimize cost of debt. This study examines whether financial reporting quality influences the cost of debt. It uses a panel dataset for 68 companies listed on the Muscat Securities Market from 2012 to 2018. The study contributes to the literature by extending the scope of previous studies on cost of debt and financial reporting quality by considering the business environment in the Sultanate of Oman where the lending environment differs from that in developed countries. The study also considers quality of accounting earnings as a proxy for financial reporting quality, by utilizing the accounting-based accruals quality model developed by Francis et al. (2005) and performance matched procedure by Kothari, Leone, and Wasley (2005). The study relies on interest rate as a proxy for cost of debt. The empirical results of this study reveal that companies with higher financial reporting quality enjoy lower cost of debt. Findings of this study provide evidence to all financial reporting users that financial reporting quality has a central role in evaluating firm performance and eliminating information asymmetry.
JEL Classification: M41, M48
Key words: Financial reporting quality, Cost of debt, Oman
(ProQuest: ... denotes formulae omitted.)
1.INTRODUCTION
Capital providers rely on financial reports to assess the extent of default risk. Existing financial reporting quality studies demonstrate that companies with high-quality financial reporting can positively influence creditor lending decisions to lower debt financing costs (Zhang, 2008; Ahmed et al., 2002). In particular, financial statements and accounting earnings are the most important single source of information to investors. Rational investors rely on reliable information about firms in their security pricing decisions. Therefore, accounting information plays a central role in evaluating firm performance and eliminating information asymmetry (Bharath, Sunder, and Sunder, 2006; Leuz and Verrecchia, 2004; Healy, 1996).
Literature that empirically link financial reporting quality with cost of debt use different measures of information quality as a proxy for financial reporting quality, such as disclosure score (Achek and Gallali, 2015), conservative accounting (Zhang, 2008; Ahmed et al., 2002), andaccruals quality (Bauwhede, Meyere, and Cauwenberge, 2015; Qi, Subramanyam, and Zhang, 2010; Francis et...