Accruals quality and the cost of debt: the European evidence

Purpose - This paper aims to investigate the empirical relationship between the cost of debt (CoD) and accruals quality (AQ) of European listed firms during the period of 2005 to 2014. Also, it aims to test the impact of the interrelationship between the financial crisis (2008-2009) andAQonCoD. Finally, we decomposeAQinto two components; the innate (InnateAQ) and discretionary components (DiscAQ); and test their relationships withCoD. Design/methodology/approach - To empirically examine the relationship betweenAQandCoD, a sample including 15 member states of the EU is constructed.AQproxy is based on theMcNichols (2002) modification ofDechow and Dichev (2002) model. A univariate analysis and a multivariate analysis are conducted to examine the relationship betweenAQandCoDafter controlling for firm characteristics and institutional variables. Findings - We find a significant negative association betweenAQandCoDin a vast proportion of the 15 countries under review. Also, the results indicate that during the crisis period, creditors pay relatively more attention to the quality of accounting information than during the pre-crisis period when they determineCoDof firms. Moreover, we report a link between the magnitude of this relationship and national characteristics and provide evidence of the significant effects of national characteristics and market forces onCoD. Finally, we find thatInnateAQdrives the relationship withCoD. Practical implications - This paper provides up-to-date evidence on the economic consequences ofAQand IFRS in the capital market. The results should, therefore, be of interest to managers, creditors, regulators and standard-setters. Originality/value - To the best of the authors’ knowledge, this is the first paper to investigate the effects ofAQonCoDfor European listed firms. Also, it examines the impact of financial crisis on the association betweenAQandCoD.