Information quality and the cost of debt capital

Information plays a crucial role in the operation of financial markets, and the quality of accounting information concerns the interests of all the information users. My thesis investigates the effect of information quality on the cost of debt capital measured by credit/bond rating, offering yield spread, and bond covenants. In terms of information quality, I calibrate the precision and composition of the information set with respect to a firm based on the methodology of Barron, Kim, Lim and Stevens (1998). To empirically examine the relationship between information quality and the cost of debt, I collect two test samples: credit rating sample and new bond issue sample.; My thesis documents the following main findings. First, higher information precision is related to more favorable credit rating. Second, there is a significantly negative relation between total information precision and offering yield spread of new bond issues. However, inconsistent with the conjecture of Easley and O'Hara (2004) and the equity market evidence provided by prior literature, I do not find in my sample that the composition of the information set with respect to a firm has significant effect on bond yield spread. Third, the impact of information precision on credit rating and offering yield spread is more pronounced for firms and bond issues with higher default risk than for those with lower default risk. Fourth, more precise public and private information can improve firms' credit ratings and reduce the offering yield spreads of their bonds. Fifth, higher information precision with respect to bond issuers is associated with fewer covenants in their bond contracts.; My thesis contributes to the literature by providing direct evidence that rating agencies and bond investors take into account the information quality of debt issuers when evaluating the creditworthiness and risk of debt issuers and their bond issues. Also my thesis develops the research on the cost of debt capital in that to the best of my knowledge this is the first study to examine jointly the effects of information quality on the price term (offering yield spread) and non-price terms (covenants) of bond contracts.; Keywords: Information Quality, Cost of Debt Capital, Information Precision, Information Composition, Rating, Offering Yield Spread...