A theory of voluntary disclosure and cost of capital

A theory of voluntary disclosure and cost of capital This paper explores the links between firms’ voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and nondisclosing firms is positive in aggregate. I further examine whether reductions in cost of capital indicate improved risk-sharing or investment efficiency. I also find that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. As average cost of capital proxies for risk-sharing but not investment efficiency, the relation between cost of capital and ex ante efficiency may be ambiguous and often irrelevant. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

A theory of voluntary disclosure and cost of capital

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-013-9223-1
Publisher site
See Article on Publisher Site

Abstract

This paper explores the links between firms’ voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and nondisclosing firms is positive in aggregate. I further examine whether reductions in cost of capital indicate improved risk-sharing or investment efficiency. I also find that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. As average cost of capital proxies for risk-sharing but not investment efficiency, the relation between cost of capital and ex ante efficiency may be ambiguous and often irrelevant.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 10, 2013

References

  • International accounting standards and accounting quality
    Barth, M.; Landsman, W. R.; Lang, M.; Williams, C.
  • Financing patterns around the world: Are small firms different?
    Becka, T.; Demirgüç-Kuntb, A.; Maksimovic, V.
  • From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle
    Bertomeu, J.; Magee, R. P.
  • Disclosure level and the cost of equity capital
    Botosan, C. A.
  • Re-examination of disclosure level and the expected cost of equity capital
    Botosan, C. A.; Plumlee, M. A.

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