Accounting Information Completeness and Firm Default Risk

Yaqin Hu and Xiaofei Zhao ()
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Yaqin Hu: DeGroote School of Business, McMaster University, 1280 Main St W, Hamilton, Ontario, Canada L8S 4L8, Canada
Xiaofei Zhao: McDonough School of Business, Georgetown University, Washington, DC 20057, USA

Quarterly Journal of Finance (QJF), 2023, vol. 13, issue 01, 1-35

Abstract: Corporate debt market is crucial to raise capital for businesses and to maintain steady economic growth. Disclosure with more complete accounting information provides more informative signals for investors to assess a firm’s risk of defaulting on its debt, which is the fundamental mechanism of the seminal theory by Duffie and Lando [2001, Term Structures of Credit Spreads with Incomplete Accounting Information, Econometrica 69(3), 633–664]. Using a disclosure quality measure that captures the completeness of accounting information in the income statement and balance sheet, we show that a firm’s default risk is significantly and negatively associated with the completeness of its accounting information. We further show that the negative relation is mainly driven by the information completeness of the balance sheet, relative to that of the income statement. In addition, the information completeness of the long-term liabilities on the balance sheet better explains a firm’s default risk, compared to the current liabilities. Overall, our findings provide new evidence on the importance of accounting information completeness for both firms and investors in the debt market.

Keywords: Information completeness; disclosure quality; default risk (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2010139223500027

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