Abstract
In this paper, we examine how international diversification affects the cost of debt capital in Korean capital market. In addition, we investigate whether the impact of international diversification on cost of debt capital are affected by 1) analyst coverage as a proxy for information environment and 2) Big 4 accounting firm as a proxy for audit quality. Our empirical results show that international diversification is negatively associated with cost of debt. We also find that the impact of international diversification on cost of debt is working only for firms with analyst coverage and only for firms audited by Big 4 audit firms, suggesting that good information environment and higher audit quality are key factors to allow firms to obtain positive effects of international diversification in Korean debt market. Keywords: International diversification, Cost of debt, Analyst following, Audit quality DOI : 10.7176/EJBM/11-33-03 Publication date: November 30 th 2019
Highlights
The number of studies investigate the relation between cost of equity and firms’ international diversification
This paper investigates whether the degree of international diversification affects cost of debt capital and examine the two factors that could affect the relation between international diversification and cost of debt: information environment and audit quality
This paper examines how international diversification affects the cost of debt capital
Summary
The number of studies investigate the relation between cost of equity and firms’ international diversification. Internationalization could increase information asymmetry so that overseas segments become less controllable (Lee and Kwok, 1988) In this context, this paper examines how international diversification affects the cost of debt capital. We find that the positive economic effect of international diversification on reduction in cost of debt is working only for firms with analysts’ coverage, a proxy for good information environment. This highlights the importance of role of the analyst in terms of information environment in capital market in Korea. Our research is composed of the following sections: Section 2 reviews relevant literature, Section 3 develops our hypothesis, Section 4 presents data and model, Section 5 reports empirical results, and Section 6 discusses research limitation and concludes our study
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