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Financial Reporting Quality and the Cost of Debt in Italian Central-Northern and Southern Smes

Pietro Fera, Antonio Meles, Nicola Moscariello, Dario Salerno
November 2020 - n. 11
Keywords: Smes, Cost of Debt, Financial Reporting, Earnings Quality, Information Asymmetry
Jel codes: G21, G32, M41

This paper investigates the relationship between financial reporting quality and the cost of debt on a sample of Italian Smes during the 2012-2017 period, i.e. after the start of the Euro area sovereign debt crisis. Consistent with existing literature, we find that, ceteris paribus, firms with high financial reporting quality (i.e., less discretionary accruals) exhibit a lower cost of debt. However, we delve deeper into this topic by investigating whether this relation varies across contexts characterized by greater or lower information asymmetries. Thus, we split our sample in firms located in South Italy and those located in Center-North Italy and find that the negative relation between financial reporting quality and the cost of debt holds only for the latter. We confirm this result by performing a number of robustness checks in order to control for differences in observable characteristics among southern and central-northern Smes.

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