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The impact of annual reports transparency and comment letters on the cost of debt: Evidence for China

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  • Zhu, Xiuli
  • Li, Xiaohui
  • Zhou, Kexin
  • Yu, Yuying

Abstract

Prior research has found that greater information transparency is positively related to a lower cost of debt. This paper studies the complementarity effect of the annual report comment letters (ARCLs) and transparency on corporate debt covenants. We find that firms receiving ARCLs charge a higher cost of debt, and the higher the frequency of ARCLs receipt, the longer the ARCLs, the requirement for qualified verification opinions, and the inclusion of debt-related keywords, the higher the cost of debt. Furthermore, information transparency can mitigate the positive regulatory effects. These findings can provide regulators, banks, and managers with a deeper understanding of the role of information disclosure and government regulation in debt covenants.

Suggested Citation

  • Zhu, Xiuli & Li, Xiaohui & Zhou, Kexin & Yu, Yuying, 2023. "The impact of annual reports transparency and comment letters on the cost of debt: Evidence for China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:pacfin:v:77:y:2023:i:c:s0927538x23000082
    DOI: 10.1016/j.pacfin.2023.101942
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    1. Liao, Feimei & Sun, Yinghao & Xu, Shulin, 2023. "Financial report comment letters and greenwashing in environmental, social and governance disclosures: Evidence from China," Energy Economics, Elsevier, vol. 127(PB).

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