Publicly traded companies devote a great deal of resources to relationships with analysts, the press and the wider investment community. It is argued that this greater transparency, and consequent reduction in asymmetric information, should produce economic benefits, among these being a reduction in the cost of capital. The current paper by Gietzmann and Ireland (2005) is one such attempt to explore and quantify this benefit. One of the difficulties facing the current authors and indeed all others who move outside the strict confines of pre‐processed computerised data is identifying suitable measures for the variables of interest. Thus in the current paper there are three fundamental concepts that require defining and mapping to a suitable numerical proxy. These are accounting choice, disclosure and the cost of capital. The inclusion of cost of capital in this set might be seen as rather surprising since cost of capital is readily defined in terms of the shareholders expected rate of return; but expectations are notoriously difficult to measure and the choice of measure may well determine the nature of the conclusions. It is therefore worth considering in detail each proxy and the problems inherent in its measure and its relationship with the
Journal of Business Finance & Accounting – Wiley
Published: Apr 1, 2005
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