Corporate disclosure quality and the cost of debt.

Abstract This paper provides evidence that firms with high disclosure quality ratings from financial analysis enjoy a lower effective interest cost of issuing debt. This findings is consistent with the argument that a policy of timely and detailed disclosures reduces lenders' and underwriters' perception of default risk for the disclosing firm, reducing its constant of debt. The results also indicate that the relative importance of disclosures is greater in situations where there is greater market uncertainty about the firm as reflected by the variance of stock returns. Since debt financial is an important source of external financing for publicly traded firms, the results have important implications on our understanding of the motives and consequences of corporate disclosures.