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Financial Statement Readability and Firm Debt Choice

Wajih Abbassi, Hamdi Ben‐Nasr, Sabri Boubaker Orcid Logo, Arman Eshraghi

Financial Management

Swansea University Author: Sabri Boubaker Orcid Logo

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DOI (Published version): 10.1111/fima.70003

Abstract

Examining more than 16,000 firm‐year observations in the United States, we provide novel evidence showing that higher financial statement readability leads to a decrease in information asymmetry and the need for external monitoring, thereby reducing the reliance on bank debt relative to public debt....

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Published in: Financial Management
ISSN: 0046-3892 1755-053X
Published: Wiley 2025
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URI: https://cronfa.swan.ac.uk/Record/cronfa70187
Abstract: Examining more than 16,000 firm‐year observations in the United States, we provide novel evidence showing that higher financial statement readability leads to a decrease in information asymmetry and the need for external monitoring, thereby reducing the reliance on bank debt relative to public debt. Our channel tests show that information asymmetry, as measured by the bid–ask spread, partially mediates the relationship between readability and the bank debt ratio. Furthermore, cross‐sectional tests demonstrate that information environment quality and financial constraints exacerbate the negative effect of readability on the bank debt ratio. Our results remain robust to a battery of additional tests. The study provides valuable insights for investors, firms, and regulators to improve transparency and market efficiency.
Keywords: bank loans, information asymmetry, monitoring, public debt, readability
College: Faculty of Humanities and Social Sciences
Funders: Hamdi Ben-Nasr acknowledges financial support from Qatar University through the internal grant “IRCC-2024-005”.

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