Corporate diversification and the cost of debt: The role of segment disclosures

Francesca Franco, Oktay Urcan, Florin P. Vasvari

Research output: Contribution to journalArticle

Abstract

Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the coinsurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a subsample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information.

Original languageEnglish (US)
Pages (from-to)1139-1165
Number of pages27
JournalAccounting Review
Volume91
Issue number4
DOIs
StatePublished - Jul 2016

Keywords

  • Co-insurance
  • Corporate diversification
  • Cost of debt
  • Segment disclosure

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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