Corporate disclosure quality and the cost of debt

This paper provides evidence that firms with high disclosure quality ratings from financial analysts enjoy a lower effective interest cost of issuing debt. This finding is consistent with the argument that a policy of timely and detailed disclosures reduces lenders' and underwriters' perception of default risk for the disclosing firm, reducing its cost of debt. The results also indicate that the relative importance of disclosures is greater in situations where there is greater market uncertainty about the firm as reflected by the variance of stock returns. Since debt financing is an important source of external financing for publicly traded firms, the results have important implications on our understanding of the motives and consequences of corporate disclosures.