Refinancing Risk and Employment Growth: The Role of Financial Reporting Quality
53 Pages Posted: 4 Nov 2019 Last revised: 7 Oct 2022
Date Written: October 2022
Abstract
We examine the role of financial reporting quality in moderating refinancing risk and facilitating corporate employment growth. As firms’ long-term debts approach maturity, information problems and conflicts of interest among capital providers create refinancing risk that can constrain borrowing. Refinancing risk is particularly relevant for funding labor, because wage rigidity creates operating leverage and human capital lacks collateral value, both of which increase credit risk and the importance of information in debt markets. Using firms’ predetermined debt maturity schedules to identify firms with significant refinancing risk and the debt contracting value of accounting information to measure financial reporting quality, we find that higher quality financial reporting moderates the negative effect of maturing debt on firms’ employment growth. This result is stronger for firms with higher default risk, those without investment-grade credit ratings, those subject to less bank monitoring, and those without unionized labor. We also examine the 2011 Eurozone sovereign debt crisis and the adoption of SFAS 131 on segment reporting as two quasi-natural experiments and find consistent evidence. Overall, our results are consistent with unique frictions in labor and debt markets creating an important role for financial reporting quality in facilitating corporate employment growth.
Keywords: financial reporting quality; employment growth; refinancing risk; debt maturity
JEL Classification: G30; J01; M41
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