Compliance with pension‐related mandatory disclosures and debt financing

Abstract

Using hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19 Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.

Political Spending, Related Voluntary Disclosure, and the Cost of Public Debt

“…Baloria et al (2019) document a negative stock price reactionto the implementation of proposals demanding political spending disclosures. This contrast speaks directly to the proponents of the view that findings from one market cannot be assumed to hold to the other market (e.g.,Almaghrabi et al, 2021;Armstrong et al, 2010;Florou & Kosi, 2015). While Baloria et al (2019) conclude that the market anticipated net costs for firms implementing proposals demanding political spending disclosures due to potential reputational risk and proprietary costs associated with the spending, our results…”

“…This yielded 4,198 bonds, issued by 963 firm-year observations. Moreover, in line with prior studies (e.g., Almaghrabi et al, 2021;Bradley et al, 2016;Waisman et al, 2015), we exclude convertible bonds (due to their more complex valuation), perpetual bonds, zero-coupon bonds and bonds with floating rates (as these types of bonds are more similar to equity). Additionally, we exclude bonds with missing data on coupon rates or with a negative risk premium (Ge & Liu, 2015).…”

“…This violates the assumption of residual independence at the lower public debt issue-level and could bias the standard errors from the OLS regression. Hence, we follow Almaghrabi et al (2021), and Liu and Magnan (2016) and, in column 4, we report the results based on a Hierarchical Linear Model (HLM) estimation. 23 Our inferences from this estimation remain qualitatively similar to those reported in Column 2, suggesting that the results are not driven by a possible bias in the estimated standard errors.…”

“…6 This also implies that the higher the political spending, the higher the uncertainty bondholders are faced with (i.e., higher difficulty to predict a firm's default risk range) (e.g., Aggarwal et al, 2012;Coates, 2012;Waisman et al, 2015). The findings suggest that given the exposure of public lenders to high information asymmetry in general (e.g., Almaghrabi et al, 2021;Florou & Kosi, 2015;Kreß et al, 2019), as well as the exposure of firms engaging in political spending to uncertainty and political risk (e.g., Aggarwal et al, 2012;Coates, 2012;Waisman et al, 2015), increased related disclosure enables more careful scrutiny of firms' political spending decisions and assists debt providers to reduce such risk and uncertainty. This is in line with disclosure theories (Duffie & Lando, 2001;Lu et al, 2010;Stiglitz & Weiss, 1981).…”