The impact of annual reports transparency and comment letters on the cost of debt: Evidence for China

Abstract

Prior research has found that greater information transparency is positively related to a lower cost of debt. This paper studies the complementarity effect of the annual report comment letters (ARCLs) and transparency on corporate debt covenants. We find that firms receiving ARCLs charge a higher cost of debt, and the higher the frequency of ARCLs receipt, the longer the ARCLs, the requirement for qualified verification opinions, and the inclusion of debt-related keywords, the higher the cost of debt. Furthermore, information transparency can mitigate the positive regulatory effects. These findings can provide regulators, banks, and managers with a deeper understanding of the role of information disclosure and government regulation in debt covenants.