Financial Reporting Quality on the Cost of Debt with Emphasis on the Role of Financial Constraints in Iran

This study examines the relationship between financial reporting quality and the cost of debt in companies listed on the Tehran Stock Exchange, as well as the moderating role of financial constraints in this relationship. The main objective of the study is to identify the effect of financial reporting quality on the cost of debt and evaluate the role of financial constraints as a moderating variable. The present study utilized data from 114 companies listed on the Tehran Stock Exchange from 2015 to 2023, and statistical analyses were conducted using the Panel Data method. Financial constraints were measured with three Altman Z-Score indices and two SA indices (SA1 and SA2). The results indicate that financial reporting quality has a positive and statistically significant relationship with the cost of debt. Therefore, the research hypothesis that the cost of debt decreases with the increase in financial reporting quality was not confirmed. Also, the moderating effect of financial constraints on the relationship between financial reporting quality and cost of debt was not significant with any of the Z, SA1, and SA2 indices. By focusing on the Iranian market and using several indicators of financial constraints simultaneously, this study fills the gap in the international literature on the moderating effect of financial constraints on the relationship between financial reporting quality and the cost of debt. It provides local empirical evidence for financial decision-makers and policymakers.