Khadija S. Almaghrabi

Globally, numerous factors influence the costs companies incur on their loans, including research and development (R&D) spending and managerial ability. When considered separately, these two factors have distinct effects on loan spreads. We investigate how R&D spending and managerial ability interact in their impact on loan spreads. Utilizing a large sample of loans issued by US firms, we find that managerial ability significantly shapes debt providers' assessment of R&D spending. Specifically, firms with high R&D expenditures managed by highly able managers pay lower spreads compared to those led by less able managers. This finding extends to the public debt market and remains consistent across various model specifications and multiple tests addressing potential endogeneity concerns. We conduct several additional analyses to explore alternative explanations. The results show that the influence of managerial ability on debt providers' assessment of R&D spending stems from the signaling of the successful R&D outcomes under more competent managers. Furthermore, we find that managerial risk incentives do not overlap with managerial ability. These findings are crucial for understanding the impact of indirect signals on the evaluation of R&D expenditures and have implications for how R&D should be reported under US GAAP and International Financial Reporting Standards (IFRS).

This study investigates the influence of exposure to climate change on the readability of narrative disclosures in annual reports. Analyzing a sample of 38,229 firm-year observations from 2002 to 2022, the study provides evidence supporting the information obfuscation hypothesis. Specifically, it finds that exposure to climate change is linked to less readable annual reports. This effect is both statistically and economically significant; a one standard deviation increase in climate change exposure leads to an 8.5% reduction in readability. Moreover, this effect is particularly evident among firms operating in environmentally sensitive industries, as well as those characterized by weak corporate culture. Additional tests indicate that the different aspects of climate change exposure (opportunity, physical, and regulatory) are individually associated with a decrease in readability of annual reports, with the physical dimension exerting the most significant impact. The findings underscore the necessity of implementing measures to mitigate climate change exposure and enhance sustainable business environments, such as transitioning to renewable energy sources (such as solar, wind, and hydro), minimizing dependence on fossil fuels, minimizing emissions from industries and transportation, sourcing low-carbon materials, adopting circular economy models, directing capital toward climate-friendly projects, and managing climate risks through catastrophe bonds and climate insurance. The significance of these actions is underscored by the impact of climate change on firms’ information environments, as documented in the current study.

Using hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.