Does earnings quality affect the cost of debt in a banking system? Evidence from French listed companies

Abstract

This study examines the effect of earnings quality on the cost of debt, for a sample of French listed firms from 2005 to 2015. Using accruals quality (AQ) as a proxy for the quality of financial reports, the results obtained confirm the research hypothesis formulated, showing that the quality of financial reports is negatively related to firms’ interest cost. The results also support that the innate component of AQ has a greater impact on the cost of debt than the discretionary component. The findings of this study may be of interest to managers by providing evidence on the economic consequences of improved earnings on the cost of debt and the factors that determine debt pricing in making decisions to minimize it. The results of this article are also important for creditors, that is, banks, showing that earnings are important in predicting firms’ reimbursement capacity (i.e. future cash flows) and that less estimation error in accruals improves the ability of earnings to predict future cash flows.

Earnings quality, institutional investors and corporate cash holdings: evidence from India

“…The studies associate earnings quality with accuracy of financial reporting, which eventually affects information asymmetry between various stakeholders. According to ‘ information asymmetry hypothesis ’, poor (high) earnings quality exacerbates (reduces) the information asymmetry and makes external capital expensive (Myers and Majluf, 1984) (lowers interest rates and facilitates firm's access to bank loans (Bharath et al ., 2008; García-Teruel et al ., 2014; Houcine and Houcine, 2020). Further, restrictive covenants are imposed on firms with lower earnings quality (Botosan, 1997; Ghosh and Moon, 2010; Sun et al ., 2012).…”

“…While firms use dividends as a signaling mechanism to symbolize steady streams of cash flow, Bozos et al (2011) observe that in times of growth and stability, earnings provide comparatively more information than dividends. In emerging economies, where banks fulfill most of the capital requirements, lenders price information risk by evaluating earnings (Carmo et al, 2016;Houcine and Houcine, 2020). This highlights the need to study cash-holding behavior with varying earnings quality.…”

Earnings Quality Research: Trend, Recent Evidence and Future Direction

“…EQ research has continued to develop. Recent studies Le et al, 2021;Houcine and Houcine, 2020;Chou and Chang, 2020;Razaee and Tuo, 2019;Eliwa et al, 2018) in answering their research questions have attempted to consider the two components of EQ. In fact, the current literature provides ample evidences confirming that the innate and discretionary component of EQ indeed affect differently the aspects of capital market.…”

The impact of corporate governance and IFRS on the relationship between financial reporting quality and investment efficiency in a continental accounting system

“…First, French firms are more closely held and have greater managerial ownership, meaning that there is a strong alignment between ownership and management (Houcine and Houcine, 2020). With greater ownership concentration, large shareholders can take advantage of their controlling positions and direct private benefits for personal consumption (Chen et al , 2011).…”

“…Second, given the increased ownership concentration, shareholder turnover is lower suggesting that shareholders play a more active role in management, which reduces their reliance on the financial reports for monitoring managerial decisions (Ball and Shivakumar, 2005). Third, since the majority of French companies are small and medium-sized, the banks are their main capital provider and may have privileged access to private information and play a more active role in the management (e.g., Van Tendeloo and Vanstraelen, 2008; Houcine and Houcine, 2020), which would reduce firms' dependence on financial reporting for decision-making. In addition, in a “ code-law ” environment, the accounting and tax systems are closely aligned, which reduces the value relevance of accounting information (Ali and Hwang, 2000; Atwood et al , 2010).…”