Firms’ Strategic Disclosure of Bad News Around Debt Offerings

January 30, 2014 Leave a comment

Firms’ Strategic Disclosure of Bad News Around Debt Offerings

Kooyul Jung 

Ulsan National Institute of Science and and Technology (UNIST)

Boyoung Kim 

Korea Advanced Institute of Science and Technology (KAIST)

Kyoungwon Mo 

Korea Advanced Institute of Science and Technology (KAIST) – College of Business
August 2013

Abstract: 
This study examines management disclosure behavior around debt offerings and its effect on the cost of debt offered. For the equity market, studies show that management disclosure of good news decreases the cost of equity. Studies also show that debt holders are more concerned with negative earnings and firm credibility. We examine this disclosure tendency of debt holders for debt offerings. We argue that firms use management forecasts of greater than zero earnings before debt offerings, and given this, they strategically tend to use bad news more than good news to increase firm credibility and reduce the cost of the debt issued. We find the results support our argument. We also find that the higher the default risk, the greater the increase in bad news forecasts (with profit) and its reduction effect in the cost of debt.

Filed under Investing Process

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment