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

Journal of International Accounting, Auditing & Taxation, 2009

Posted: 25 Jul 2009

See all articles by Akinobu Shuto

Akinobu Shuto

University of Tokyo - Graduate School of Economics

Shota Otomasa

Kansai University

Kazuyuki Suda

Waseda University; Graduate School of Finance, Accounting and Law, Waseda University

Date Written: May 26, 2009

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 bond market 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 bond investors.

Keywords: dirty surplus items, cost of debt, relative information content, incremental information content

JEL Classification: M41, M47, M44

Suggested Citation

Shuto, Akinobu and Otomasa, Shota and Suda, Kazuyuki and Suda, Kazuyuki, The Relative and Incremental Explanatory Powers of Dirty Surplus for Debt Interest Rate (May 26, 2009). Journal of International Accounting, Auditing & Taxation, 2009, Available at SSRN: https://ssrn.com/abstract=1410150

Akinobu Shuto (Contact Author)

University of Tokyo - Graduate School of Economics ( email )

Hongo, 7-3-1
Bunkyo-ku
Tokyo, 1130033
Japan

Shota Otomasa

Kansai University ( email )

3-3-35 Yamatecho
Osaka, 564-8680
Japan

Kazuyuki Suda

Waseda University ( email )

Chuo-ku Nihonbashi
Tokyo
Japan
81-3-3272-6823 (Phone)

Graduate School of Finance, Accounting and Law, Waseda University ( email )

1-4-1 Nihonbashi
Chuo-ku, Tokyo 103-0027
Japan
+81 3-3272-6823 (Phone)
+81 3-3272-6823 (Fax)

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