Internal Control Reporting and Cost of Bond Financing : Evidence From China

Using a sample of Chinese listed firms and a difference-in-differences research design, we examine how internal control reporting (ICR) affects firms’ bond cost. We find that, during the voluntary ICR period, bondholders only reward voluntary disclosers perceived as having higher quality of ICR and internal control systems. In addition, during the mandatory ICR period voluntary disclosers experience a significantly lower cost of debt than that of nonvoluntary disclosers, which may be explained by voluntary disclosers’ higher quality of internal control. The difference in debt cost is more pronounced when firms operate in high litigation risk and competition-intensive industries, and when the firms’ information environment is weak or the bondholders have a high demand for ICR information