Title

Does the relation between information quality and capital structure vary with cross-country institutional differences?

Publication Type

Journal Article

Publication Date

9-2016

Abstract

Prior research based on U.S. data finds that firms with better information quality raise more equity whereas firms with poorer information quality prefer to issue debt when they seek external financing. Little is known about whether the same conclusion holds outside the U.S. and how the country-level institutional environment influences the relation between information quality and capital structure choices. We examine the relation between accounting information quality (measured by earnings precision, accruals quality, and analyst consensus) and financial leverage across 24 countries and whether that relation varies systematically with country-level investor protection and financial orientation. We document a lower financial leverage for firms with better information quality. More importantly, we find a stronger relation between information quality and financial leverage in countries with weaker investor protection and more market-oriented economies. These cross-country results suggest that information quality is especially important in shaping a firm's capital structure decision when investor demand for information is greater.

Keywords

capital structure, financial leverage, information quality, investor protection, bank-oriented economy, market-oriented economy

Discipline

Accounting

Research Areas

School of Accountancy (SOA)

Publication

Journal of International Accounting Research

Volume

15

Issue

3

First Page

131

Last Page

156

ISSN

1542-6297

Identifier

10.2308/jiar-51606

Publisher

American Accounting Association

Additional URL

http://doi.org./10.2308/jiar-51606

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