Essays on the debt market consequences of corporate disclosure

This thesis comprises two empirical studies on the effect of corporate disclosure within the debt market. \nThe first empirical study investigates the effect of compliance with IFRS mandatory disclosure on firms’ access to the public debt market and, subsequently, on the cost of newly issued public and private debt. The study relies on hand-collected data on the level of compliance with 166 disclosure items from five IFRS disclosure areas, for a sample of 953 firm-year observations across four IFRS-adopting countries with the highest debt issuance. Consistent with the role of corporate disclosure in reducing information risk and the differences between public and private lenders, the study finds that the level of compliance with IFRS mandatory disclosure is positively associated with access to the public debt market. Furthermore, the study finds that firms with higher levels of mandatory disclosure pay a lower cost of public debt, but not a lower cost of private debt. Thus, the benefits of mandatory disclosure in reducing information risk are only realisable when lenders rely heavily on financial statements in their decision making, due to their limited access to private information. These findings are robust to several sensitivity tests, as well as to accounting for potential endogeneity through applying an IV estimation, a simultaneous equation, a Heckman selection model or a PSM technique, or through controlling for additional determinants of disclosure. In additional tests, the study finds that (1) the increase in the level of disclosure above a country’s minimum disclosure level is positively associated with access to the public debt market and negatively associated with the cost of public, but not private debt, and (2) the effect of IFRS mandatory disclosure is symmetric across firms with different costs of debt. \nThe second empirical study investigates the effect of voluntary political spending disclosure on the cost of public debt, as well as the role of firm-level political sensitivity and industry-level regulation in this association. The US Supreme Court’s decision of 2010, Citizens United v. Federal Election Commission, allows US public firms to spend unlimited amounts of money on politically related activities, which has led to a significant increase in firms’ political spending and has raised a debate on whether political spending disclosures need to be mandated in firms’ filings with the US Securities and Exchange Commission (SEC). The study utilises a measure of voluntary political spending disclosure that became available in 2012 and a large dataset on US firms’ actual political spending, manually compiled from different filings. Based on a sample of public debt issued over the period between 2013 and 2018 by S&P 500 constituent firms, the study shows that firms with higher levels of political spending disclosure bear a lower cost of public debt. Moreover, the study finds that the effect of disclosure is present regardless of firm-level political sensitivity or industry-level regulation. Thus, the benefits of political spending disclosure appear to outweigh any potential proprietary costs. These findings are robust to several sensitivity checks, as well as to accounting for potential endogeneity through applying an IV estimation, a simultaneous equation, a Heckman selection model or a PSM technique, or through controlling for additional determinants of the disclosure. In additional tests, the study finds that (1) the channel through which political spending disclosures reduce the cost of debt relates to the reduction in information risk associated with the amount of political spending, (2) the effect of disclosure is asymmetric across firms with different costs of debt, where firms with high costs of debt benefit more in terms of a reduction in the cost of debt for an increase in disclosure, than firms with low costs of debt, and (3) the effect of disclosure holds, irrespective of the political party with which a firm is aligned.