Financial reporting quality impact on the firms’ capital structure

Inês Lisboa, Magali Costa and Carolina Reis

Review of Accounting and Finance, 2025, vol. 24, issue 3, 310-328

Abstract: Purpose - Most research suggests that capital structure is influenced by two elements: the firms’ internal and external characteristics. This study aims to add knowledge to the literature by analyzing the impact of firms’ financial information quality on capital structure options. Financial reports are the principal basis for most financial decisions, so their quality and content heavily influence firms’ financial choices. Design/methodology/approach - An unbalanced panel sample of 414 listed firms on the main stock exchanges of Portugal (PSI), Italy (FTSE/MIB), Greece (FTSE/ATHEX) and Spain (IBEX 35) between 2013 and 2022 is analyzed. To achieve a more comprehensive result, capital structure and financial reporting quality are measured through multiple proxies. Capital structure is evaluated by the total and the maturity debt ratios, based on book and market values, and financial reporting quality is measured through four proxies: accruals quality, smoothness, timeliness and accounting conservatism. Findings - The global analysis revealed mixed results, with three variables of the financial reporting quality exhibiting a positive impact on debt (accruals quality, smoothness and accounting conservatism), while the remaining proxy presented a negative impact (timeliness). Further analysis also indicates that companies affected by Troika policies experienced a contrasting effect of timeliness on debt, while the other firms displayed results consistent with the global analysis. Originality/value - This work contributes to enlarging the capital structure debate by analyzing the impact of financial reporting quality, an effect little addressed by previous literature. Moreover, several proxies of financial reporting quality are used. Besides accruals quality or earnings management proxy, which is the most analyzed, the authors also include the proxies of smoothness and accounting conservatism, little investigated and timeliness that were not considered by previous researchers. Additionally, as control variables, not only firms’ specific characteristics are included but also macroeconomic factors. Therefore, the contributions of the paper are relevant to all stakeholders to broaden knowledge of factors that define the capital structure, as well as the relevance of firms to display financial reporting with quality.

Keywords: Capital structure; Financial reporting quality; Earnings management; Smoothness; Conservatism; Timeliness; Listed companies; European countries; Troika; G15; G17; G32; M40 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-07-2024-0290

DOI: 10.1108/RAF-07-2024-0290

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