Debt Specialization and Information Opaqueness

Abstract

In this study, we suggest that level of information opaqueness determines the propensity of publicly listed firms to have debt financing from only a few debt types (i.e., debt specialization). Using accruals quality as a proxy for information opaqueness, we find that the degree of debt specialization is lower for firms with high-quality accruals. This result is consistent with the notion that information collection and monitoring costs are higher for firms that have higher informational opacity, explaining the tendency toward debt specialization. We further argue that the demand for monitoring by creditors is lower for firms with intensified institutional monitoring. The empirical findings show that firms with more concentrated institutional owners are more likely to be less specialized by debt type and that debt specialization is less sensitive to accruals quality in such firms. Using earnings timeliness and readability of annual reports as alternative proxies for information quality, we confirm the higher propensity to concentrate debt claims by type. We further examine how debt specialization changes following the arrival of bad news and find that the debt structure is more sensitive to accruals quality following the issuance of SEC letters regarding reporting deficiencies.