The Effect of Financial Reporting Quality on the Cost of Debt: Sultanate of Oman Evidence

The cost of debt provides signals not only on firm financing but also on managerial ability to increase the bottom line. Thus, good quality financial reporting practice enable firms to optimize cost of debt. This study examineswhether financial reporting quality influences the cost of debt. It uses a panel dataset for 68 companies listed on the Muscat Securities Market from 2012 to 2018. The study contributes to the literature by extending the scope of previous studies oncost of debt and financial reporting quality by considering the business environment in the Sultanate of Oman where the lending environment differs from that in developed countries. The study also considers quality of accounting earnings as a proxy for financial reporting quality, by utilizing the accounting-based accruals quality model developed by Francis et al. (2005) andperformance matched procedure by Kothari, Leone, and Wasley (2005). The study relies on interest rate as a proxy for cost of debt. The empirical results of this study reveal that companies with higher financial reporting quality enjoy lower cost of debt. Findings of this study provide evidenceto all financial reporting users that financial reporting quality has a central role in evaluating firm performance and eliminating information asymmetry.