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Financial disclosure readability and innovative firms' cost of debt

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  • Arvid O. I. Hoffmann
  • Stefanie Kleimeier

Abstract

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.

Suggested Citation

  • Arvid O. I. Hoffmann & Stefanie Kleimeier, 2021. "Financial disclosure readability and innovative firms' cost of debt," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 699-713, June.
  • Handle: RePEc:bla:irvfin:v:21:y:2021:i:2:p:699-713
    DOI: 10.1111/irfi.12292
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    References listed on IDEAS

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    4. Cunyi Yang & Conghao Zhu & Khaldoon Albitar, 2024. "ESG ratings and green innovation: A U‐shaped journey towards sustainable development," Business Strategy and the Environment, Wiley Blackwell, vol. 33(5), pages 4108-4129, July.

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