Abstract

This study examines the impact of financial statement comparability on the cost of debt. Financial statement comparability alleviates information asymmetry between managers and investors, thereby reducing the cost of acquiring and analyzing information for investors. Moreover, financial statement comparability allows investors to more readily understand similarities and differences across companies, and contributes to higher quantity and quality of information. Thus, investors are able to make more efficient investing decisions and require lower risk premium. Based on this reasoning, we predict that greater financial statement comparability decreases the cost of debt. We test our predictions using a sample of firms listed on the Korean Stock Exchange over the period from 2006 to 2012. Our empirical results show that firms that exhibit greater financial statement comparability have lower cost of debt. Moreover, we find that for firms with high level of financial distress, financial statement comparability decreases the cost of debt more significantly. This study contributes to our understanding of the critical role of financial statement comparability in reducing firms’ financing costs from debt investors. In addition, our findings provide evidence that financial statement comparability improves the usefulness of accounting information, and allows investors to make more efficient investing decisions. As financial statement comparability is drawing more attention after the adoption of IFRS, we believe that the results of our study provide valuable insights to managers, outside investors, and regulators.

Keywords

• Financial Statement Comparability
• Bond Yield Spreads
• Financial Distress

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