Does earnings quality affect the cost of debt in a banking system? Evidence from French listed companies

This study examines the effect of earnings quality on the cost of debt, for a sample of French listed firms from 2005 to 2015. Using accruals quality (AQ) as a proxy for the quality of financial reports, the results obtained confirm the research hypothesis formulated, showing that the quality of financial reports is negatively related to firms' interest cost. The results also support that the innate component of AQ has a greater impact on the cost of debt than the discretionary component. The findings of this study may be of interest to managers by providing evidence on the economic consequences of improved earnings on the cost of debt and the factors that determine debt pricing in making decisions to minimize it. The results of this article are also important for creditors, that is, banks, showing that earnings are important in predicting firms' reimbursement capacity (i.e. future cash flows) and that less estimation error in accruals improves the ability of earnings to predict future cash flows.