Financial Statement Comparability’s Effect on Credit Ratings and Cost of Debts Depending on Corporate Listing Status
Asian Tax Journal Vol. 18 No. 4 (2017), pp. 63-110
Abstract
This study empirically examines the effect of financial statement comparability on the credit rating and firm’s cost of debt. Additionally, this study examines whether firm’s listing status affects comparability’s effect on credit rating and cost of debt. Prior studies document that financial statement comparability lowers loan interest spreads (Fang et al. 2012), credit spreads for both bonds and credit default swaps (Kim et al. 2013), and the cost of debt for bonds, and increases bond ratings (Lee and Ko 2014). However, these studies focus on public companies and do not examine how the effect of comparability on credit ratings and cost of debt varies across public vs. private firms. Our study tries to fill the void in the literature. We measure earnings comparability and cash flow comparability following De Franco et al.(2011) and use credit ratings provided by Nice Information Service Inc. and loan interest rate and loan interest spreads as cost of debt. Our sample covers public and private firms in non－financial industries from 2009 to 2014 and the final sample is 19,687 firms－year observations. Our main findings are as follows. First, while neither earnings comparability nor cash flow comparability for public firms is associated with firm credit ratings, earnings comparability for private firms is significantly positively associated with credit ratings. Second, only cash flow comparability is negatively associated with cost of debt for public firms, while both earnings comparability and cash flow comparability are negatively associated with cost of debt for private firms. These results suggest that earnings comparability is important in the evaluation of private companies by rating agencies or debtholders, while cash flow comparability is important in creditors’ evaluation of both pubic and private firms. Third, the effect of cash flow comparability on credit ratings and cost of debts does not differ between public firms vs. private firms. However, earnings comparability decreases cost of debt and increases credit ratings more for private firms compared to public firms. This result implies that both rating agencies and debtholders put more weight on earnings comparability rather than cash flow comparability in evaluating private firms. Overall, our results suggest that financial statement comparability is more important in evaluating private companies rather than public companies, and that creditors rather than rating agencies put more weight on comparability in analyzing firm’s financial statements. To the best of our knowledge, this study is the first comparing the different effect of comparability on firm’s credit rating and cost of debt for public vs. private firms. Therefore, our study contributes to the debate on financial reporting quality of public versus private companies as well as to the literature on financial statement comparability. We expect that this paper offers useful insight to practitioners, accounting standard setters, policy makers as well as academia.
Keywords
- Listing status
- Financial statement comparability
- Cost of debts
- Credit rating
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