The Relative and Incremental Explanatory Powers of Dirty Surplus for Debt Interest Rate

Akinobu Shuto (), Shota Otomasa and Kazuyuki Suda
Additional contact information
Shota Otomasa: Faculty of Commerce, Kansai University, Japan
Kazuyuki Suda: Graduate School of Finance, Accounting and Law, Waseda University, Japan

No 230, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This study investigates the relationship between dirty surplus items on the balance sheet and the cost of debt for Japanese firms. We focus on three dirty surplus items-unrealized gains and losses on available-for-sale securities (SEC), foreign currency translation adjustment (FOC), and land revaluation surplus (LAND). While many previous studies on dirty surplus adopted the value-relevance perspective, we examine the effect of dirty surplus items on the interest rate spread of bonds from the contractual perspective. We use the Vuong (1989) test to evaluate the relative explanatory power of the equity ratio with and without dirty surplus items for the interest rate spread on bonds issued. We find evidence that the equity ratio with dirty surplus items is more strongly associated with the debt interest rate than that without dirty surplus items. The results suggest that the total amount of dirty surplus items have statistically significant explanatory power for the interest rate spread. However, some dirty surplus items do not have explanatory powers for the bond interest rate spread. While FOC has relative and incremental explanatory powers and SEC has only incremental explanatory power, LAND has neither relative nor incremental explanatory power for the bond interest rate spread. The results mean that FOC and SEC are useful to Japanese firms for bond contracting.

Keywords: Dirty surplus items; Cost of deb; Relative information content; Incremental information content (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-08, Revised 2008-03
New Economics Papers: this item is included in nep-acc
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kob:dpaper:230

Access Statistics for this paper

More papers in Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University 2-1 Rokkodai, Nada, Kobe 657-8501 JAPAN. Contact information at EDIRC.
Bibliographic data for series maintained by Office of Promoting Research Collaboration, Research Institute for Economics & Business Administration, Kobe University ().