CORPORATE DISCLOSURE QUALITY AND THE COST OF DEBT

This paper provides evidence that firms with high disclosure quality r atings from financial analysts enjoy a lower effective interest cost o f issuing debt. This finding is consistent with the argument that a po licy of timely and detailed disclosures reduces lenders' and underwrit ers' perception of default risk for the disclosing firm, reducing its cost of debt. The results also indicate that the relative importance o f disclosures is greater in situations where there is greater market u ncertainty about the firm as reflected by the variance of stock return s. Since debt financing is an important source of external financing f or publicly traded firms, the results have important implications on o ur understanding of the motives and consequences of corporate disclosu res.