Financial reporting quality and the cost of debt of SMEs
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.
KeywordsSME Cost of debt Financial reporting quality Information asymmetry
JEL ClassificationsG21 G32 M41
The authors gratefully acknowledge the Hercules Foundation (AUGE/11/013), the National Bank of Belgium, and the Special Research Fund at Ghent University for financial support and the participants at the Corporate Finance Research Meeting and Ph.D. Day at Ghent University and the 2013 Annual Congress of the European Accounting Association (EAA) for useful comments.
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