Internal control disclosures, monitoring, and the cost of debt

Dan S Dhaliwal, Chris Hogan, Robert Trezevant, Michael Wilkins

Research output: Contribution to journalArticle

89 Citations (Scopus)

Abstract

We test the relationship between the change in a firm's cost of debt and the disclosure of a material weakness in an initial Section 404 report. We find that, on average, a firm's credit spread on its publicly traded debt marginally increases if it discloses a material weakness. We also examine the impact of monitoring by credit rating agencies and/or banks on this result and find that the result is more pronounced for firms that are not monitored. Additional analysis indicates that the effect of bank monitoring appears to be the primary driver of these monitoring results. This finding is consistent with the argument that banks are effective delegated monitors for the debt market. The results of this study suggest the need for future research, particularly to test the differential effects of monitoring on the cost of debt compared to the cost of equity.

Original languageEnglish (US)
Pages (from-to)1131-1156
Number of pages26
JournalAccounting Review
Volume86
Issue number4
DOIs
StatePublished - Jul 2011

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Monitoring
Internal control
Cost of debt
Disclosure
Debt
Material weakness
Cost of equity
Credit spreads
Bank monitoring
Credit rating agencies

Keywords

  • Bank monitoring
  • Cost of debt
  • Monitoring of debt
  • Section 404 reporting

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Internal control disclosures, monitoring, and the cost of debt. / Dhaliwal, Dan S; Hogan, Chris; Trezevant, Robert; Wilkins, Michael.

In: Accounting Review, Vol. 86, No. 4, 07.2011, p. 1131-1156.

Research output: Contribution to journalArticle

Dhaliwal, Dan S ; Hogan, Chris ; Trezevant, Robert ; Wilkins, Michael. / Internal control disclosures, monitoring, and the cost of debt. In: Accounting Review. 2011 ; Vol. 86, No. 4. pp. 1131-1156.
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