Corporate diversification and the cost of debt: The role of segment disclosures

Franco, F and Vasvari, F and Urcan, O (2016) Corporate diversification and the cost of debt: The role of segment disclosures. Accounting Review, 91 (4). pp. 1139-1165. ISSN 0001-4826

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Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the co-insurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a subsample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information.

Item Type: Article
Additional Information: © 2016 American Accounting Association
Subjects: D > Debt financing
B > Bond yields
D > Disclosure of financial information
Subject Areas: Accounting
Date Deposited: 02 Mar 2016 18:51
Last Modified: 01 Sep 2017 09:44

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