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The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy

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  • Nikolaev, V.
  • Lent, L.A.G.M. van

    (Tilburg University, Center for Economic Research)

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    Abstract

    The purpose of this paper is twofold.First, we provide a discussion of the problems associated with endogeneity in empirical accounting research.We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes.Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm disclosure policy.We document how including a set of variables which theory suggests to be related with both cost-of-debt capital and disclosure and using fixed effects estimation in a panel dataset reduces the endogeneity bias and produces consistent results.This analysis reveals that the effect of disclosure policy on cost-of-debt capital is 200% higher than what is found in Ordinary Least Squares estimation.Finally, we provide direct evidence that disclosure is impacted by unobservable firm-specific factors that are also correlated with cost-of-capital.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-67.

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    Date of creation: 2005
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    Handle: RePEc:dgr:kubcen:200567

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    Web page: http://center.uvt.nl

    Related research

    Keywords: Disclosure policy; cost-of-debt capital; endogeneity;

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    Cited by:
    1. Michael Grüning, 2011. "Capital Market Implications of Corporate Disclosure: German Evidence," BuR - Business Research, German Academic Association for Business Research, vol. 4(1), pages 48-72, March.
    2. Jankensgård, Håkan, 2013. "An Empirical Test of the Optimal Disclosure Hypothesis," Knut Wicksell Working Paper Series 2013/6, Knut Wicksell Centre for Financial Studies, Lund University.
    3. Ahlem NAJAH & Anis JARBOUI, 2013. "Extra-Financial Disclosure And The Cost Of Debt Of Big French Companies," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 3(4), pages 57-69, December.
    4. Chaiyasit Anuchitworawong, 2010. "The Value of Principles-Based Governance Practices and the Attenuation of Information Asymmetry," Asia-Pacific Financial Markets, Springer, vol. 17(2), pages 171-207, June.
    5. Gopal V. Krishnan & Wei Yu, 2011. "Further evidence on knowledge spillover and the joint determination of audit and non-audit fees," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(3), pages 230-247, March.
    6. Kerstin Kiefer & Philipp Schorn, 2007. "Auswirkungen der IFRS-Umstellung auf die Risikoprämie von Unternehmensanleihen - Eine empirische Studie für Deutschland, Österreich und die Schweiz," SFB 649 Discussion Papers SFB649DP2007-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. Benito Arruñada, 2008. "Mandatory accounting disclosure by small private companies," Economics Working Papers 1090, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Flora Muiño Vázquez & Marco Trombetta, 2007. "Does graph disclosure bias reduce the cost of equity capital?," "Marco Fanno" Working Papers 0039, Dipartimento di Scienze Economiche "Marco Fanno".
    9. Kuang, Y. & Qin, B., 2006. "Performance-vested Stock Options and Pay-Performance Sensitivity," Discussion Paper 2006-123, Tilburg University, Center for Economic Research.
    10. Belén Gill de Albornoz Noguer & Manuel Illueca Muñoz, 2007. "La calidad de los ajustes por devengo no afecta al coste de la deuda de las PYMES españolas," Investigaciones Economicas, Fundación SEPI, vol. 31(1), pages 79-117, January.
    11. Zhang, Haiwen, 2009. "Effect of derivative accounting rules on corporate risk-management behavior," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 244-264, June.
    12. Romilda Mazzotta & Stefania Veltri, 2014. "The relationship between corporate governance and the cost of equity capital. Evidence from the Italian stock exchange," Journal of Management and Governance, Springer, vol. 18(2), pages 419-448, May.

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