Internal whistleblowing and cost of debt: Do managerial ability and ownership concentration matter?

This study investigates the impact of internal whistleblowing systems (IWS) on the cost of debt (COD), along with the moderating roles of managerial ability and ownership concentration. Using a panel dataset of Chinese A-share listed firms from 2009 to 2022, we find that IWS significantly reduces COD, suggesting that it functions as a disciplinary mechanism enhancing transparency and reducing capital market frictions. We examine two potential channels: information asymmetry and agency cost. We find strong support for the information asymmetry channel, indicating that IWS lowers borrowing costs by improving transparency and reducing information gaps between firms and creditors. In contrast, the agency cost channel is not supported, suggesting that IWS may not significantly reduce borrowing costs by curbing managerial opportunism. Our moderation analysis shows that both managerial ability and ownership concentration negatively affect COD while both weaken the negative relation between IWS and COD. This suggests that in firms with strong internal oversight, the added benefit of whistleblowing in reducing the cost of debt is limited, indicating a substitution effect. We also find that the IWS–COD relation is stronger among financially constrained firms and non-state-owned enterprises. The results are robust to various specifications, alternative COD measures, and endogeneity concerns. These findings offer important implications for creditors, corporate managers, and policymakers in emerging markets where governance and ownership structures vary.