The relationship between income smoothing and the cost of debt: evidence from the United Kingdom and Nigeria

Abstract

Purpose This paper aims to examine the association between income smoothing and the cost of debt in two different countries, namely, the UK and Nigeria. Design/methodology/approach The authors used a sample from listed firms in the UK and Nigeria during 2000–2019. The study hypotheses are examined by implementing quantitative methods, including panel regression analysis, cross-sectional regression analysis and parametric independent samples t-test. Findings The results reveal that Nigerian companies have a substantially higher cost of debt and are more active in using income-smoothing practices. However, the relationship between income smoothing and the cost of debt is not found to be statistically significant in both countries. Besides, the results of this study show that financial leverage, profitability, company size and asset turnover are significantly associated with the cost of debt. Originality/value The study contributes to the existing literature by providing new insights concerning the contrast between developed and developing countries in financial and reporting issues.