Earnings quality and the cost of debt of German non-listed firms and the impact of leverage

In this study, the relationship between earnings quality of German non-listed firms and the cost of debt is examined. A sample of 6,821 non-listed firms between the period 2013 and 2015 is used. The relationship between earnings quality and the cost of debt is examined by using OLS regressions. The examination shows that the earnings quality of non-listed firms is negatively related to those firms’ effective interest cost. The results in this study are consistent with the idea that earnings are important for lenders to better predict default risk and the repaying capacity of a loan. Next, this study finds that leverage has a negative association with earnings quality and the cost of debt. Finally, through moderation- and mediation analyses, this study finds that leverage does not have a moderating effect on the relationship between earnings quality and the cost of debt, but has a mediating (indirectly) effect.