Financial disclosure readability and innovative firms' cost of debt

Innovative firms confront potential lenders with various risks, including possible innovation failure, uncertain R&D investment payoffs, cash flow volatility, and low collateral value of hard‐to‐value intangible assets. As a result, these firms might struggle to obtain financing. More readable f...

Full description

Saved in:
Bibliographic Details
Published in:International review of finance 2021-06, Vol.21 (2), p.699-713
Main Authors: Hoffmann, Arvid O. I., Kleimeier, Stefanie
Format: Article
Language:English
Subjects:
bank loans
cost of debt
Financial disclosure
financial disclosure readability
information asymmetry
information uncertainty
innovation
Innovations
R&D
Research & development
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Innovative firms confront potential lenders with various risks, including possible innovation failure, uncertain R&D investment payoffs, cash flow volatility, and low collateral value of hard‐to‐value intangible assets. As a result, these firms might struggle to obtain financing. More readable financial disclosures could mitigate the informational risk around innovative firms' fundamentals, ease their monitoring by lenders, and thus ultimately reduce these firms' cost of debt. In this regard, we find that while all firms can overcome information uncertainty about their firm fundamentals and reduce their spreads by having more readable financial disclosures, there is an additional benefit in terms of readability further lowering the cost of debt for innovative firms. The additional benefit that innovative firms can achieve from having more readable financial disclosures, however, is limited to situations of more pronounced information asymmetry where there is no previous lending relationship.
ISSN:1369-412X
1468-2443
DOI:10.1111/irfi.12292