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Small Business Economics

, Volume 45, Issue 1, pp 149–164 | Cite as

Financial reporting quality and the cost of debt of SMEs

  • Heidi Vander Bauwhede
  • Michiel De Meyere
  • Philippe Van Cauwenberge
Article

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.

Keywords

SME Cost of debt Financial reporting quality Information asymmetry 

JEL Classifications

G21 G32 M41 

Notes

Acknowledgments

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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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Heidi Vander Bauwhede
    • 1
  • Michiel De Meyere
    • 1
  • Philippe Van Cauwenberge
    • 1
  1. 1.Department of Accountancy and Corporate FinanceGhent UniversityGhentBelgium

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