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Financial statement readability and firm debt choice

Abbassi, Wajih, Ben-Nasr, Hamdi, Boubaker, Sabri and Eshraghi, Arman ORCID: https://orcid.org/0000-0002-7406-1725 2025. Financial statement readability and firm debt choice. Financial Management 10.1111/fima.70003

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Abstract

Examining more than 16,000 firm-year observations in the United States, we provide novel evidence showing that higher financial statement readability leads to a decrease in information asymmetry and the need for external monitoring, thereby reducing the reliance on bank debt relative to public debt. Our channel tests show that information asymmetry, as measured by the bid–ask spread, partially mediates the relationship between readability and the bank debt ratio. Furthermore, cross-sectional tests demonstrate that information environment quality and financial constraints exacerbate the negative effect of readability on the bank debt ratio. Our results remain robust to a battery of additional tests. The study provides valuable insights for investors, firms, and regulators to improve transparency and market efficiency.

Item Type: Article
Date Type: Published Online
Status: In Press
Schools: Schools > Business (Including Economics)
Publisher: Wiley
ISSN: 0046-3892
Date of First Compliant Deposit: 29 July 2025
Date of Acceptance: 25 July 2025
Last Modified: 19 Aug 2025 11:00
URI: https://orca.cardiff.ac.uk/id/eprint/180089

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