The impact of disclosure quality on cost of debt – evidence from Vietnam

Purpose This study revisits the causal effect of a firm’s disclosure quality on the cost of debt in an emerging market, Vietnam, where the regulations regarding corporate disclosure have been upgraded. Design/methodology/approach We employ least squares dummy variable (LSDV) and difference-in-difference (DiD) estimation with a regulation shock that forces firms to improve their disclosure quality. Findings High disclosure quality firms have lower cost of debt. In addition, due to the regulation change, firms with poor disclosure quality can save around 1% in their cost of debt as their disclosure quality improves. Moreover, better disclosure quality reduces the cost of debt when firms confront heightened uncertainty or tight monetary policy. Practical implications The finding implies that governmental regulations aimed at enhancing information transparency in emerging markets remain effective. Firms that improve their disclosure quality can experience a reduced cost of debt. The study highlights the economic benefits of corporate disclosures and provides insights for policymakers in emerging markets to enhance corporate disclosure standards. Originality/value By using the regulation change as an exogenous shock to achieve more precise identification, the paper addresses the limitations of previous studies regarding the endogeneity problem inherent in the relationship between corporate disclosure and market outcomes. Additionally, with a measure of timely disclosure based on an exogenous event, this paper provides reliable evidence on how the timeliness of disclosure affects the cost of debt. Furthermore, while several studies have investigated the relationship between disclosure quality and the cost of debt in developed markets, this research focuses on a bank-based market where loans are more common than bond issuances in corporate financing and where collateral plays a key role in securing loans.