Cost Of Debt Research Articles

ESG performance and the cost of debt: exploring the role of internal audit

ABSTRACT This study investigates the effect of Environmental, Social, and Governance (ESG) performance on capital-raising costs in the debt market. The study also examines the role of internal audit organizations in this relationship. The results of the current study show that firms with high ESG performance have lower cost of debt. More importantly, when ESG is classified into sub-factors (E, S, and G), all three are negatively associated with the cost of debt. Next, the current study documents that the presence of an audit committee, the increase in the number of internal audit members, and the higher independence of the internal audit organization incrementally weaken the negative relationship between ESG and the cost of debt. The results remain robust across various additional tests and when endogeneity concerns are mitigated. Overall, these findings suggest the possibility that, as a primary risk assessment function, an independent and large internal audit organization exposes and highlights ESG risks to external credit rating agencies. The findings of this study offer valuable practical insights into how internal audit organizations can effectively assess and contribute to the evaluation of ESG performance.

Data Breach Notification Laws and the Cost of Private Debt

We examine the effect of state-level data breach disclosure mandates (DBN laws) on the cost of private debt. Using the staggered passage of DBN laws across the U.S., we document an increase in the cost of private debt for firms affected by these laws. These findings suggest that DBN laws increase lenders’ anticipation of cash flow risk from potential future costs related to data breach disclosures. We further document that the increase in the cost of private debt is more pronounced for firms that (i) belong to industries that are susceptible to data breaches, (ii) report internal control weaknesses, or (iii) disclose cyber security risks in their risk factor disclosures. Additionally, we find that the increase in the cost of private debt is less pronounced in firms that focus on cyber security measures, such as investing in cyber security or appointing a technology officer on their board. We contribute to the debt contracting and disclosure literature by focusing on the proactive response of private lenders after the passage of DBN laws to mitigate ex-ante the risk resulting from potential future data breach disclosures while also shedding light on the cost (financing cost) associated with mandatory disclosure practices.

Blockholders, Environmental Information Disclosure, and the Cost of Debt

ABSTRACT Debt financing is an essential source of external funds for Chinese-listed companies, but enterprises in heavily polluting industries face more severe financing difficulties due to the “financing penalty effect.” Solving the financing difficulties of heavy pollution enterprises has become a hot topic in academic and practical circles. This article applies heavily polluting listed companies from 2013 to 2022 in China as a sample to examine the impact of multiple blockholders (MB) on debt financing costs (DFC), considering the intermediary role of environmental information disclosure (EID). This article reveals that improved environmental information disclosure, driven by multiple blockholders, especially state-owned ones, can effectively reduce debt financing costs for heavily polluting enterprises compared to those dominated by a single major shareholder. These findings remain robust even after considering a series of checks, including the instrument variable method, propensity score matching (PSM), and alternative variables. In cases where the separation of ultimate control rights and cash flow rights is slight or the entity is state-owned, state-owned blockholders tend to exert a more effective governance role. Our research helps understand the role of multiple blockholders in corporate “green governance” and can provide a reference for alleviating the financing constraints of heavy-polluting enterprises.

ESG disclosure quality and cost of debt

ESG disclosure quality and cost of debt

The Influence of Tax Avoidance and Tax Risk on Debt Costs in Property and Real Estate Sector Companies Listed on the Indonesia Stock Exchange

This study aims to empirically test the effect of tax avoidance and tax risk on debt costs in property and real estate sector companies listed on the Indonesia Stock Exchange. The research used a quantitative approach with secondary data in the form of financial reports presented by the company as a basis for collecting data. The population in this study were property and real estate sector companies listed on the Indonesia Stock Exchange with reports that became research data for the period 2019-2022 with a total population of 91 companies. The sampling method used was purposive sampling with the criteria of companies that had been listed and had not experienced losses during the research year and there were 21 companies. This study uses Descriptive Statistical Tests, then Classical Assumption Tests, then continued with Hypothesis Tests. The results of this study indicate that tax avoidance has a positive and significant effect on debt costs, tax risk also has a significant negative effect on debt costs.

The Role of Environment Social and Governance (ESG) Score To Cost of Debt: Evidence From ASEAN Countries*

ABSTRACTEnvironmental social governance (ESG) disclosure has become an increasingly important component in determining a company's financing cost (cost of debt‐CoD). This phenomenon could be attributed to company reputation development and the rise of socially responsible investing. We contribute to the existing literature by investigating further the causality process of ESG scores to the reduction of CoD particularly in nonfinancial companies in one of the most dynamic world regions: Association of Southeast Asian Nations (ASEAN). To meet our research objective; we applied difference‐in‐difference analysis to a dataset of 135 nonfinancial companies (that published ESG score in Bloomberg) from 6 ASEAN countries, using annual frequency data from 2012 to 2021 (1350 observations). We found that ESG does reduce CoD in the range of 21.3% (measured by interest expense) to 27.7% (measured by credit spread). Our finding is quite solid under an array of robustness checks.

Does climate policy uncertainty influence the corporate cost of debt?

This paper employs a sample of Chinese A-share listed companies spanning from 2011 to 2022 to empirically investigate the influence of climate policy uncertainty on the corporate cost of debt, based on the theory of financial friction. We find that climate policy uncertainty significantly increases the corporate cost of debt, and the result is supported by robustness tests. To avoid biases arisen from endogeneity, this paper introduces an instrumental variable approach and propensity score matching method for verification. The endogeneity test results support the baseline regression results as well. Finally, this paper also discovers that financing constraints are the potential mechanism behind the impact of climate policy uncertainty on the corporate cost of debt.

The Effects of Fiscal Rules on Mexico’s Municipalities: Looking at Fiscal Behavior Changes

ABSTRACT This paper evaluates the fiscal effects of the Financial Discipline Law for States and Municipalities (LDFEM, in Spanish) on Mexican local governments. As a public financial management (PFM) reform, the LDFEM is an agency solution that establishes a national fiscal rule to align subnational fiscal behavior and achieve a sustainable fiscal position in all states and municipalities. This paper uses a quasi-experimental research design to explore the effects of complying with the LDFEM on financial conditions–budget balances and debt management. The findings suggest improvements in budget balances and debt costs and no impact on variations in debt obligations.

Farmers' Financial Literacy—Scale Development and Linkages to Accounting Practices and Financial Outcomes

ABSTRACTThis study investigates the financial literacy (FL) of Swedish farmers, its linkages to farmer characteristics, management accounting practices and farm outcomes by surveying Swedish Farm Accountancy Data Network farmers. Using item response theory, we expand the existing FL measurement specifically to the farming context, assess measurement items and compare shorter and longer scales of FL. Our findings indicate high levels of FL among respondents. FL is positively associated with more extensive management accounting practices, greater farm profitability and lower cost of debt, independent of other farmer characteristics, including education, numeracy, need for cognition, and money vigilance. The findings suggest the relevance of FL as a farmer characteristic for both practices and outcomes, even when included through its shortest and more established measurement scale.

Impact of Enterprise Supply Chain Digitalization on Cost of Debt: A Four-Flows Perspective Analysis Using Explainable Machine Learning Methodology

Rising costs, complex supply chain management, and stringent regulations have created significant financial burdens on business sustainability, calling for new and rapid strategies to help enterprises transform. Supply chain digitalization (SCD) has emerged as a promising approach in the context of digitalization and globalization, with the potential to reduce an enterprise’s debt costs. Developing a strategic framework for SCD that effectively reduces the cost of debt (CoD) has become a key academic challenge, critical for ensuring business sustainability. To this end, under the perspective of four flows, SCD is deconstructed into four distinct features: logistics flow digitalization (LFD), product flow digitalization (PFD), information flow digitalization (IFD), and capital flow digitalization (CFD). To precisely measure the four SCD features and the dependent variable, COD, publicly available data from Chinese listed manufacturing enterprises such as annual report texts and financial statement data are collected, and various data mining technologies are also used to conduct data measurement and data processing. To comprehensively investigate the impact pattern of SCD on CoD, we employed the explainable machine learning methodology for data analysis. This methodology involved in-depth data discussions, cross-validation utilizing a series of machine learning models, and the utilization of Shapley additive explanations (SHAP) to explain the results generated by the models. To conduct sensitivity analysis, permutation feature importance (PFI) and partial dependence plots (PDPs) were also incorporated as supplementary explanatory methods, providing additional insights into the model’s explainability. Through the aforementioned research processes, the following findings are obtained: SCD can play a role in reducing CoD, but the effects of different SCD features are not exactly the same. Among the four SCD features, LFD, PFD, and IFD have the potential to significantly reduce CoD, with PFD having the most substantial impact, followed by LFD and IFD. In contrast, CFD has a relatively weak impact, and its role is challenging to discern. These findings provide significant guidance for enterprises in furthering their digitalization and supply chain development, helping them optimize SCD strategies more accurately to reduce CoD.

Earning management and cost of debt financing: Evidence from Vietnamese listed companies

While earnings management has been employed to conceal corporations' true performance, concerns have risen regarding its adverse impact on financing costs, particularly the cost of debt. This study, therefore, aims to examine the impact of earnings management on the cost of debt in Vietnam. Using data on 197 companies during 2016-2020 in a wide variety of industries and a quantile regression approach, which allows different magnitudes in the impact of earnings management on the cost of debt, the study indicates the negative impact of earnings management on the cost of debt. Earnings management leads to a higher cost of debt. The result supports the garbling theory that Vietnamese firms engage in earnings management exhibit a higher cost of debt as a form of punishment for gaming earnings. In Vietnam, the impact of earnings management is more severe at high levels of debt.

Financial decision dynamics: Environmental, social, and governance factors and managerial choices in emerging markets

This study examines the linkage between the ESG performance of firms and managerial decision-making. It uses 8 years of ESG performance data of 110 Indian firms collected from the Thomson Reuters database. The study finds that high ESG performance mitigates a firm’s cost of debt more than equity cost. Furthermore, increases in ESG performance are associated with higher capital expenditures, lower investment cash flow sensitivity, higher cash holdings, and lesser payout of increased cash flows to shareholders. The findings are in sync with the Slack resources view, suggesting that the requirement of financial Slack for ESG-related innovations and risk-bearing is large and impacts the major managerial decisions of firms. While the effects of environmental and social performance on these decisions are similar to that of the composite ESG performance, governance performance shows an independent impact on the payout decisions of firms. The Granger Causality test reveals a bi-directional association between debt issues and ESG performance. The main results obtained from the multiple panel regressions are robust to additional tests involving lead-lag analysis. The overall findings of this study highlight the importance of ESG performance screening in the managerial decision-making process of investors who would not like to risk growth potential for a short-term increase in dividends.

The Influence of Socially Responsible Practices on Corporate Hedging

This study examines the nexus between firm hedging strategies and corporate social responsibility (CSR). Utilizing textual analysis of 10-K filings to measure corporate hedging, we find that firms with higher levels of CSR are more inclined to engage in hedging practices and with greater intensity. This tendency is further amplified in the presence of strong corporate governance frameworks. We posit that this is primarily driven by the mitigation of cash flow volatility, the cost of equity, and the cost of debt. Our analysis encompasses various endogeneity tests, including entropy balancing and an instrumental variables approach that considers political and geographic factors. The robustness of the results is further validated through alternative CSR and hedging metrics. This study contributes to the growing body of literature on the strategic financial implications of CSR, highlighting the complementary role of CSR in corporate risk management.

Effect Of Funding Structure And Liquidity On The Financial Performance Of The Sugar Industry In Kenya

The main aim of this study was to determine the effect of funding structure on the financial performance of the sugar industry in Kenya. The relationship between funding structure and financial performance is crucial within Kenya's sugar industry, as it directly impacts resource allocation, expense management, and overall profitability. Inadequate financial management can result in liquidity challenges, affecting the sector's competitiveness and sustainability. Conversely, a well-balanced funding structure, incorporating both debt and equity, has the potential to strengthen financial stability. Stockholder, Trade-offs, and Pecking order guided the study. The study employed a correlational research design. The study's target population consisted of 16 sugar companies operational in Kenya. Purposive sampling was used to select 9 sugar companies. A total of 324 secondary data points from 2014 to 2022 were collected, including the cost of equity, debt, retained earnings, and economic value added, derived from financial statements and cash flows. The results showed a significant positive relationship between funding structure and Economic value added (coeff=0.863126, p=0.000<0.005). This reveals that Companies that maintain an appropriate funding structure are more likely to achieve higher Economic Value Added (EVA) over the long run. Given the positive long-term correlation between funding structure and EVA, it can be inferred that Kenyan sugar companies should prioritize maintaining a balanced funding structure to improve financial performance. The study concludes that funding structure has a significant relationship with economic value added

Transmission of Monetary policy impulses on the Capital Structure of Manufacturing firms: Evidence from an Emerging Economy

A country's monetary policy influences a firm's economic decisions by influencing the cost of external debt offered to firms by commercial banks. However, research on the effect of monetary policy on the capital structure of firms located in bank credit-driven developing economies is limited. This research paper tries to fill that gap by examining the effects of monetary policy impulses on the short- and long-term capital structure of firms in an emerging economy. Using quadratic econometric equation and GMM regression model study analyzes annual financial data of 2575 non-financial firms belonging to 8 manufacturing sectors covering the duration of 13 years ranging from 2009 to 2021. The results show a curvilinear relationship between monetary policy impulses and firms' capital structure in different manufacturing industry sectors. Monetary policy was found to have a different impact on short-term and long-term borrowings of financially flexible and inflexible manufacturing firms.

Should underwriters be trusted? Reducing agency costs through primary market supervision

We examine the mandated introduction of a supervised auction framework within China's primary bond market. This regulatory intervention resulted in a substantial reduction in debt costs for Chinese Bond issuers, primarily attributed to the alleviation of agency conflicts between underwriters and issuers. Leveraging unique bidder-level data obtained from a lead underwriter, our study provides replicable tools to discern collusive bidding behavior. This sheds light on instances of artificially inflated bond yields, highlighting economically burdensome practices. Our findings can assist regulators, issuers, and investors engaged in unsupervised auction mechanisms. Our insights offer potential enhancements to regulatory frameworks and operational efficiency across various sectors, including securities issuance, construction projects, and procurement.

Debtholders' reaction to sustainability reporting regulations: International evidence

AbstractThis study investigates the impact of mandatory sustainability reporting on the affected firms' debt financing costs. Leveraging sustainability disclosure regulations enacted in 36 jurisdictions from 1998 to 2022 and using a staggered difference‐in‐differences empirical approach, we find that the regulation adoption firms experience a reduction in the debt financing cost subsequent to the mandate. Channel tests reveal that the benefit of a lower cost of debt is driven by greater transparency on sustainable practices and improved sustainability performance, which lead to a lower level of default risk stemming from sustainability‐related concerns. Cross‐sectional analyses further indicate that the debt financing cost reduction effect is more pronounced if the sustainability reporting regulations are issued by a government institution, on a full compliance basis, and with stronger enforcement. Our results provide policymakers with further evidence on the ongoing discussion about the effectiveness of sustainability disclosure mandates.

Beyond the balance sheet: Assessing corporate governance through the Lens of debtholders

This study investigates the relationships between economic uncertainty (EU), corporate governance (CG), and the cost of debt (COD). Using an index-based measure of CG, this study investigates how CG influences debtholders' perspectives during periods of EU. The study utilizes a dataset of nonfinancial firms listed in European countries from 2013 to 2021. We find that EU and COD are positively associated, indicating that EU increases the COD of European firms. Second, while CG has an insignificant direct impact on COD, it has a significant negative moderating impact on the relationship between EU and COD, suggesting that although a strong CG mechanism does not have any significant direct impact on COD, it has the potential to reduce the uncertainty-induced COD of European firms. The results remain consistent with alternative proxies of COD and CG, as well as before and after the COVID-19 period. The results for CG subindices suggest that shareholder rights and compensation serve as reliable indicators for debtholders during periods of EU, while audit quality and board structure do not play any significant role in reducing uncertainty-induced COD. Our findings emphasize the key role that effective CG plays in mitigating EU's adverse effects on COD. Our results are robust to endogeneity issues such as reverse causality, selection bias, and time and industry effects.

The impact of carbon risk on the cost of debt in the listed firms in G7 economies: The role of the Paris agreement

The Paris Agreement, signed in 2015, sets ambitious goals for diminishing greenhouse gas emissions and restricting the rise in global temperature to achieve a less carbon-intensive and climate-resilient global economy. The Paris Agreement marked a defining moment in the worldwide response to global warming and has significantly affected the financial sector. Given this background, this research explores the effects of carbon risk on the cost of debt (CoD) in 1428 listed firms across seven economies from 2011 to 2020. The paper also reflects the post-Paris Agreement's involvement and the ESG factors' moderating effect in the empirical models. The study finds a significant impact of carbon risk on CoD following the implementation of the Paris Agreement. Notably, companies with higher carbon risk face higher borrowing rates. However, the effect of ESG on moderating the relationship between carbon risk and CoD is found to be insignificant. Further analyses confirm this finding, as individual pillars of ESG (governance and social aspects) also show insignificant moderating effects.

Does Mutual Tenure of CFOs and Auditors Affect Accounting Information Comparability? Evidence from China

ABSTRACT Little work has been conducted regarding the effect of mutual tenure of CFOs and auditors on accounting information comparability. Using data of Chinese listed companies from 2011 to 2019, this study shows that the mutual tenure of CFOs and auditors contributes to a higher accounting information comparability. Further investigations imply that the main effect is more pronounced among auditees with lower operational complexity and auditors with greater competence and expertise. Finally, we find that the strong correlation cannot be extended to other core decision-makers (i.e., CEOs and board chairmen) and that mutual tenure lowers debt costs and enhances firm value.