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Financial reporting quality and the cost of debt of SMEs

Author

Listed:
  • Heidi Vander Bauwhede
  • Michiel De Meyere
  • Philippe Van Cauwenberge

Abstract

This study explores a large and detailed dataset of financial statements of Belgian small and medium-sized enterprises (SMEs) over the 1997–2010 period. Using accruals quality as a proxy for the quality of SMEs’ financial reports, we find that the quality of SMEs’ financial statements is negatively related to those companies’ effective interest cost. This result is also highly economically significant. The findings in this paper are consistent with the idea that earnings are important for creditors in predicting SMEs’ reimbursement capacity (i.e., future cash flows) and that less estimation error in accruals enhances earnings’ ability to predict future cash flows. We deliver evidence of an important economic benefit of financial reporting for SMEs, to wit, the potential to reduce information asymmetry between SMEs and their creditors through higher-quality financial reporting. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Heidi Vander Bauwhede & Michiel De Meyere & Philippe Van Cauwenberge, 2015. "Financial reporting quality and the cost of debt of SMEs," Small Business Economics, Springer, vol. 45(1), pages 149-164, June.
    • Handle: RePEc:kap:sbusec:v:45:y:2015:i:1:p:149-164
    DOI: 10.1007/s11187-015-9645-1
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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