Other comprehensive income and the cost of debt capital

Abstract

The purpose of this paper is to examine the association between the cost of debt and other comprehensive income (OCI) and its components for a sample of US firms. The empirical analysis is conducted on a sample of 4,350 firm-years observations for the period 2008–2018. In conducting the analysis, we first run the models using ordinary least squares (OLS) regressions and correcting for heteroskedasticity using White (1980) standard errors. Then, we compute the F-statistic using a Wald test. The main results indicate that the separate disclosure of foreign currency translation adjustments, pension adjustments, available-for-sale marketable securities, and derivative securities and/or foreign currency hedging adjustments and the total OCI provide information that is relevant for the cost of debt. Our results will benefit creditors, standard setters, and regulators when examining the effect of each component of OCI on the cost of debt capital. Our study enriches the recent stream of research that investigates the usefulness of decomposing other comprehensive income into its components. This paper contributes to the accounting literature on the value relevance of OCI to the users of the financial statements by showing the effect of OCI on the cost of debt capital. This study supplements and extends the prior research, which documents the value relevance of OCI to the cost of equity capital