Financial reporting quality and the cost of debt of SMEs

Abstract

This study explores a large and detailed dataset of financial statements of Belgian small and medium-sized enterprises (SMEs) over the 1997–2010 period. Using accruals quality as a proxy for the quality of SMEs’ financial reports, we find that the quality of SMEs’ financial statements is negatively related to those companies’ effective interest cost. This result is also highly economically significant. The findings in this paper are consistent with the idea that earnings are important for creditors in predicting SMEs’ reimbursement capacity (i.e., future cash flows) and that less estimation error in accruals enhances earnings’ ability to predict future cash flows. We deliver evidence of an important economic benefit of financial reporting for SMEs, to wit, the potential to reduce information asymmetry between SMEs and their creditors through higher-quality financial reporting

Can Management Accounting Be Helpful for Young and Small Companies? Systematic Review of a Paradox

“…; Vander Bauwhede et al . ). Management of liquidity has been found to lead to growth (two hypotheses).…”

Earnings Quality in Private SMEs: Do CEO Demographics Matter?

“…Campa and Camacho‐Minano () report upward earnings management for financially distressed SMEs. Vander Bauwhede, De Meyere, and Van Cauwenberge () document a lower cost of debt for SMEs with higher earnings quality.…”

Affiliation of Indonesian audit firms with Big4 and second‐tier audit firms and the cost of debt

“…To test our hypothesis, we estimate the following regression, where j and t index companies and years respectively: In line with prior empirical studies (J. Francis et al, ; Minnis, ; Vander Bauwhede et al, ) we measure the cost of debt ( COD ) as the ratio of a company's interest expense over the average amount of financial debt over the year. We use the 1‐year ahead value in order to mitigate the concern stemming from the staleness of the cost of debt variable (Minnis, ).…”

“…We regress these companies' costs of debt on an ordered categorical variable indicating whether their local Indonesian audit firm was affiliated with (1) a Big4 audit firm, (2) a second‐tier audit firm, or (3) none of the two, together with various control variables, including interest coverage, profitability, leverage, asset tangibility, size, the occurrence of negative equity, age, growth, and cash flow performance. In line with prior studies (J. Francis, LaFond, Olsson, & Schipper, ; Minnis, ; Vander Bauwhede, De Meyere, & Van Cauwenberge, ), we proxy the cost of debt by the effective interest cost; that is, the ratio of the interest expense to the average amount of financial debt.…”

“…In line with prior studies (J. Francis, LaFond, Olsson, & Schipper, 2005;Minnis, 2011;Vander Bauwhede, De Meyere, & Van Cauwenberge, 2015), we proxy the cost of debt by the effective interest cost; that is, the ratio of the interest expense to the average amount of financial debt. Endogeneity concerns stemming from auditor self-selection might yield inconsistent coefficient estimates when estimating the model using ordinary least-squares (OLS) estimation (Heckman, 1976(Heckman, , 1978.…”