TY - JOUR
T1 - Financial disclosure readability and innovative firms' cost of debt
AU - Hoffmann, Arvid O. I.
AU - Kleimeier, Stefanie
N1 - data sources: Loan Pricing Corporation's DealScan database; Compustat (North America); Bonsall, Leone, Miller, Rennekamp's (2017) Bog Index scores available at https://kelley.iu.edu/bpm/activities/bogindex.html
PY - 2021/6
Y1 - 2021/6
N2 - Innovative firms confront potential lenders with various risks, including possible innovation failure, uncertain R&D investment payoffs, cash flow volatility, and low collateral value of hard-to-value intangible assets. As a result, these firms might struggle to obtain financing. More readable financial disclosures could mitigate the informational risk around innovative firms' fundamentals, ease their monitoring by lenders, and thus ultimately reduce these firms' cost of debt. In this regard, we find that while all firms can overcome information uncertainty about their firm fundamentals and reduce their spreads by having more readable financial disclosures, there is an additional benefit in terms of readability further lowering the cost of debt for innovative firms. The additional benefit that innovative firms can achieve from having more readable financial disclosures, however, is limited to situations of more pronounced information asymmetry where there is no previous lending relationship.
AB - Innovative firms confront potential lenders with various risks, including possible innovation failure, uncertain R&D investment payoffs, cash flow volatility, and low collateral value of hard-to-value intangible assets. As a result, these firms might struggle to obtain financing. More readable financial disclosures could mitigate the informational risk around innovative firms' fundamentals, ease their monitoring by lenders, and thus ultimately reduce these firms' cost of debt. In this regard, we find that while all firms can overcome information uncertainty about their firm fundamentals and reduce their spreads by having more readable financial disclosures, there is an additional benefit in terms of readability further lowering the cost of debt for innovative firms. The additional benefit that innovative firms can achieve from having more readable financial disclosures, however, is limited to situations of more pronounced information asymmetry where there is no previous lending relationship.
KW - bank loans
KW - cost of debt
KW - financial disclosure readability
KW - information asymmetry
KW - information uncertainty
KW - innovation
KW - R&D
U2 - 10.1111/irfi.12292
DO - 10.1111/irfi.12292
M3 - Article
SN - 1369-412X
VL - 21
SP - 699
EP - 713
JO - International Review of Finance
JF - International Review of Finance
IS - 2
ER -