Financial Reporting Quality and cost of debt: Evidence from Family and Non-family Firms in Sultanate of Oman

Abstract

The cost of debt provides signals not only concerning how the firms are financed but also pertaining to the ability of managers  to increase the bottom line-income statement item. Thus, with good quality of financial reporting practice, firms are expected to experience the optimum level of the cost of debt.The aim of this study is to examine whether there is a relationship between financial reporting quality and cost of debt among family and non-family owned companies in the Sultanate of Oman. This study uses a panel dataset for 68 companies listed in Muscat Securities Market over the period from 2005 to 2011. The study contributes to the literature by extending the scope of previous studies concerning the cost of debt and financial reporting quality by considering the business environment in the Sultanate of Oman where family ownership and control are more common. Additionally, lending environment in Oman is very different from that in developed countries. For instance, in Oman banks are the dominant players in the financial sector and firms still overwhelmingly rely on banks to satisfy their capital needs. Furthermore, based on the difference between family and non-family owned firms with Type I and Type II agency problems, this study further contributes to the literature by examining the influence of financial reporting quality on the cost of debt, which is expected to be different for family and non-family firms. The empirical results indicate that the association between financial reporting quality and cost of debt is negative and significant for the full sample and non-family firms. However, this relationship is weak for family firms.