An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Aloke Ghosh
Baruch College The City University of New York

Doocheol Moon
SUNY

Abstract: Our study establishes a linkage between two extensively researched areas, capital structure and the quality of corporate disclosures. According to the managerial opportunism hypothesis, corporate disclosures are less informative about the firms’ economic performance when debt is high because managers use the financial reporting discretion to reduce the likelihood of debt covenant violations. An opposing view is that debt and disclosure quality are positively associated because of the monitoring role of debt. Using characteristics of analyst earnings forecasts and independent third party ratings by AIMR as proxies for disclosure quality, we find a strong negative relationship between debt (long-term debt to total assets) and disclosure quality. Our results are robust to alternative estimation methods such as fixed effects model and two-stage least squares. Further, we provide direct evidence of declining disclosure quality following the issuance of new debt.

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