Soft Information and Creditor Reliance on Hard Information

50 Pages Posted: 2 Mar 2014 Last revised: 3 May 2016

See all articles by David M. Reeb

David M. Reeb

National University of Singapore - Dept of Accounting

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis; European Corporate Governance Institute (ECGI)

Date Written: December 15, 2014

Abstract

We examine the importance of soft information in credit markets by exploiting two groups of firms: public (listed) firms and semi-public (non-listed) firms, both of which issue public debt. These two groups share the same hard information requirements (SEC requires both to file accounting statements) but semi-public firms face limited requirements to disclose soft information. Using a matched sample, we find that creditors require 40 to 50 basis points higher yield spreads in semi-public firms compared to public firms. Although hard information makes up a smaller percentage of the total information available for listed (public) firms, we also find that key financial statement variables exhibit over 80% less explanatory power on yield spreads in semi-public firms than in public firms. Additional tests indicate that neither bond analysts nor credit rating agencies appear to mitigate soft information concerns about hard information reliability in semi-public firms. To account for the endogenous choice to issue equity to the public, we use difference-in-differences tests around exogenous changes in soft information disclosure requirements for public firms. We find an increased gap in yield spreads and the reliance on hard information between public and semi-public firms around these exogenous changes. We conclude that soft information regarding corporate operations influences investor willingness to rely on hard information provided by the firm.

Keywords: Soft Information, Cost of Debt, Yield Spreads, Semi-public Firms, Private Firms, Bond Analysts, Credit Ratings, Regulation

JEL Classification: G32, G34, M48

Suggested Citation

Reeb, David M. and Roth, Lukas, Soft Information and Creditor Reliance on Hard Information (December 15, 2014). Available at SSRN: https://ssrn.com/abstract=2403312 or http://dx.doi.org/10.2139/ssrn.2403312

David M. Reeb

National University of Singapore - Dept of Accounting ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

Lukas Roth (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32E Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-4431 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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