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Accounting Quality and Debt Concentration: Evidence from Internal Control Weakness Disclosures

Author

Listed:
  • Ningzhong Li
  • Yun Lou

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Clemens Otto

    (SIS - Singapore Management University)

  • Regina Wittenberg Moerman

Abstract

This paper examines how accounting quality affects the degree of debt concentration in corporate capital structures (i.e., a firm's tendency to predominantly rely on only a few types of debt). Motivated by theoretical and empirical research that supports a strong link between creditors' coordination costs and debt concentration and the importance of accounting quality in reducing these coordination costs, we hypothesize that firms with low accounting quality have a more concentrated debt structure. Measuring financial reporting quality by the disclosure of material internal control weaknesses over financial reporting (ICWs), we find that ICWs lead to a significantly more concentrated debt structure. We also show that the effect of ICWs on the degree of debt concentration is stronger for more severe ICW disclosures and for firms with a higher credit risk, further reinforcing the importance of financial reporting quality in determining debt concentration.

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  • Ningzhong Li & Yun Lou & Clemens Otto & Regina Wittenberg Moerman, 2014. "Accounting Quality and Debt Concentration: Evidence from Internal Control Weakness Disclosures," Working Papers hal-02011410, HAL.
    • Handle: RePEc:hal:wpaper:hal-02011410
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    Cited by:

    1. Petya Platikanova & Kazbi Soonawalla, 2020. "Who monitors opaque borrowers? Debt specialisation, institutional ownership, and information opacity," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1867-1904, June.

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