Earnings transparency and debt financing: evidence on debt levels and borrowing costs in India

Abstract

This study examines how earnings transparency (ET) impacts debt financing, focusing on both the level of debt and the cost of borrowing in Indian firms, an emerging market featured by severe information frictions. Using a panel dataset of 2,520 listed firms over the period 2010–2025, we employ multiple econometric techniques, including fixed-effects estimation, instrumental variable two-stage least squares and system generalized method of moments to establish a causal relationship. The results indicate that ET significantly enhances corporate debt financing. Additionally, greater transparency is associated with lower debt costs, suggesting that transparent firms benefit from lower borrowing costs. These findings remain robust across alternative measures of transparency, different model specifications and endogeneity corrections. The findings underscore that improving ET enhances firms' access to the debt market and reduces borrowing costs, offering valuable insights for managers, lenders and policymakers. This study provides thorough evidence from a large emerging economy by examining both the quantity and pricing of debt simultaneously. It further highlights ET's role as an institutional substitute in environments with weaker formal governance.