The impact of earnings quality and audit on the cost of debt of Italian SMEs

The paper aims to provide insights on the effects of financial information quality on the cost of debt, in a sample of Italian SMEs. While literature on earnings quality (EQ) and debt relations is extensive about public companies, little is known about this relation in the peculiar context of private companies, especially SMEs. Italy is a suitable context to study SMEs, not only for their economic importance (99% of total firms) but also because their financial data are publicly available and they are subject to mandatory audit. By means of an empirical model, I test whether and how EQ and audit affect the cost of debt in SMEs. I provide evidence that both earnings quality and audit have reducing effects on the cost of debt in Italia SMEs. These results enlarge the knowledge about the role of financial information in SMEs and offer new insights on the usefulness of measuring financial information quality in SMEs. Moreover, these results contribute to the enlargement of EQ literature towards new settings and offer support to national and international accounting setters in improving the quality of financial information of SMEs.