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The impact of narrative disclosure readability on bond ratings and the cost of debt

Review of accounting studies, 2017-06, Vol.22 (2), p.608-643 [Peer Reviewed Journal]

Springer Science+Business Media New York 2017 ;Review of Accounting Studies is a copyright of Springer, 2017. ;ISSN: 1380-6653 ;EISSN: 1573-7136 ;DOI: 10.1007/s11142-017-9388-0

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  • Title:
    The impact of narrative disclosure readability on bond ratings and the cost of debt
  • Author: Bonsall, Samuel B. ; Miller, Brian P.
  • Subjects: Accounting/Auditing ; Bond issues ; Bond markets ; Bond ratings ; Business and Management ; Corporate Finance ; Credit ratings ; Disclosure ; Financial disclosure ; Public Finance ; Ratings & rankings ; Readability ; Studies
  • Is Part Of: Review of accounting studies, 2017-06, Vol.22 (2), p.608-643
  • Description: Prior research on the determinants of credit ratings has focused on rating agencies’ use of quantitative accounting information, but the there is scant evidence on the impact of textual attributes. This study examines the impact of financial disclosure narrative on bond market outcomes. We find that less readable financial disclosures are associated with less favorable ratings, greater bond rating agency disagreement, and a higher cost of debt. We improve causal identification by exploiting the 1998 Plain English Mandate, which required a subset of firms to exogenously improve the readability of their filings. Using a difference-in-differences design, we find that the firms required to improve the readability of their filings experience more favorable ratings, lower bond rating disagreement, and lower cost of debt. Collectively, our evidence suggests that textual financial disclosure attributes appear to not only influence bond market intermediaries’ opinions but also firms’ cost of debt.
  • Publisher: New York: Springer US
  • Language: English
  • Identifier: ISSN: 1380-6653
    EISSN: 1573-7136
    DOI: 10.1007/s11142-017-9388-0
  • Source: ProQuest Central
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