Soft Information and Disclosure Reliability: Evidence from Debt Issuances

Abstract

We examine the importance of soft information in credit markets by exploiting two groups of firms: public (listed) firms and semi-public (non-listed) firms, both of which issue public debt. These two groups share the same hard information requirements (SEC requires both to file accounting statements) but semi-public firms face limited requirements to disclose soft information. Using a matched sample, we find that creditors require 40 to 50 basis points higher yield spreads in semipublic firms compared to public firms. Although hard information makes up a smaller percentage of the total information available for listed (public) firms, we also find that key financial statement variables exhibit over 80% less explanatory power on yield spreads in semi-public firms than in public firms. Additional tests indicate that neither bond analysts nor credit rating agencies appear to mitigate soft information concerns about hard information reliability in semi-public firms. To account for the endogenous choice to issue equity to the public, we use difference-in-differences tests around exogenous changes in soft information disclosure requirements for public firms. We find an increased gap in yield spreads and the reliance on hard information between public and semipublic firms around these exogenous changes. We conclude that soft information regarding corporate operations influences investor willingness to rely on hard information provided by the firm. JEL Classifications: G32, G34, M48