Research On The Relationship Between Earnings Fluctuation And The Cost Of Debt

In today's high corporate debt-to-asset ratio,the cost of debt will directly affect the residual equity enjoyed by corporate investors.Therefore,an in-depth study of the factors which affect debt cost will play a key guiding role for enterprises and help enterprises maximize their value.Nowadays,most of the researches focus on the impact of corporate internal governance,market environment and economic situation on corporate debt costs,while ignoring the game between creditors and debtors that will affect the debt costs.Therefore,this paper bases on the perspective of agency cost theory,information asymmetry theory and signal transmission theory,and considers debt costs from the perspective of creditors.The business activities of the enterprise will be transmitted to the creditors in the form of information,and the creditors will pay attention to this information.We suggest enterprises to pay attention to the relationship with external creditors,strengthen their cooperative relationship and achieve a win-win result.This paper selects the outstanding achievement which is easier to be observed and valued by creditor,to measure the impact of the uncertainty that creditors may face on debt costs.At the same time,considering that the enterprises cannot avoid the fluctuation of performance due to their development,how to effectively mitigate the negative impact will play an important role for the enterprise.Therefore,we consider the adjustment effect of internal control and the mitigation of information asymmetry by information transparency.We analyze the impact of performance volatility,internal control,and information transparency on debt financing costs from literature and theory.We select all listed companies' data from 2009 to 2017 after the 2008 financial crisis and calculate earnings fluctuation in the past three years.Finally we obtain 12175 sample data from 2011 to 2017 and use stata12.0 to measure the relationship between the earnings fluctuation and the cost of debt,as well as the internal control quality and information transparency.We finally find that the earnings fluctuation measured by the standard deviation of ROA in the past three years and the standard deviation of ROE in the past three years both significantly affect the cost of debt,cause it rising.Further research reveals that internal control plays a positive role in regulating earnings fluctuation and the cost of debt.When considering information transparency,empirical results show that when companies'earnings is volatile,the information transparency can effectively reduce the costs of debt.However,it cannot play a positive role when the earnings is stabilize.Finally,based on the conclusion above,listed companies should pay more attention to the long-term development of enterprises,avoide the short-term interests that causes the instability of corporate performance,and at the same time strengthen communication and information transmission with creditors,and create a safer and more reliable business environment for creditors.