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Voluntary disclosure and the cost of capital
Abstract
We investigate the association between voluntary disclosure and the risk-related discount investors apply to price. First, we study the association between (endogenous) disclosure choice and the discount in price induced by changes in the underlying model parameters: this is akin to an empirical study that overlooks the role of endogenity. Second, we investigate the incremental effect of disclosure on the discount in price: this is akin to an empirical study that controls for the direct effect of exogenous factors on the discount in price. Finally, we examine the incremental effect of disclosure on the discount in price when changes in disclosure are not induced by changes in underlying exogenous parameters: this is akin to an empirical study that controls for the effect of exogenous factors on both the discount in price and disclosure, and focuses on the association between “unexplained disclosure” and the discount.
... For example, Coller and Yohn (1997) find that high information asymmetry is associated with increased management forecasting. Clinch and Verrecchia (2015) argue that this can result in a positive relation between management forecasts and cost of capital, as Francis et al. (2008) find. 39 We address the possibility that information asymmetry drives management forecasts by regressing VD on the lagged information asymmetry variables (Spread, PIN, and Impact) in the VD and EQ-VD Models. ...
... To address the concern that EQ potentially reflects operating volatility jointly determining high EQ and CoC values, we repeat our EQ and EQ-VD Models after first regressing, within our SEM, the EQ factor on cash flow variability, sales variability, and the proportion of losses over the prior ten years (Francis et al. 2004). This parses out the portion of EQ associated with operating volatility, Clinch and Verrecchia (2015) broadly argue that unaddressed endogeneity induces a positive relation between disclosure and cost of capital. We find a negative relation, indicating endogeneity is not likely to drive results. ...
Structural equation modeling (SEM), an empirical methodology underutilized in archival research, enables researchers to examine paths linking constructs. SEM consists of two components: a measurement model that generates common factors from observed variables and a path model that links the factors. We discuss SEM’s components, estimation, advantages, best practices, and limitations. We illustrate SEM with an application to disclosure research. Unlike some prior research, we find voluntary disclosure quality is negatively associated with cost of capital, both directly and indirectly through information asymmetry, even after controlling for earnings quality’s direct and indirect associations with cost of capital. We believe SEM offers fruitful avenues for future research because it allows flexibility in modeling relations guided by theory, enables tests of underlying theoretical mechanisms, provides tools to address measurement error and missing data, and estimates simultaneous equations. SEM may be useful in settings that currently use path analysis or principal component analysis.
Data Availability: Data used in this study are available from public sources identified in the paper.
JEL Classifications: M41; C30.
... Clinch and Verrecchia [43] contributed to the debate by adding voluntary disclosure. It was documented that the voluntary disclosure of ESG activities brought a positive vibe to the organization. ...
Corporations that prioritize Environment, Social, and Governance (ESG) considerations tend to have a more sustainable approach to business operations with a lower impact on the environment and society. Extant literature is available on the impact of ESG on firm performance, risk-taking, profitability, the cost of capital, cash flows, and default risk. However, very little is known about the role of ESG performance in shaping the current and future value of a corporation. Similarly, hi-tech firms, being a part of the rapidly growing sector of the world, are facing greater scrutiny from investors, regulators, and consumers to demonstrate their commitment to sustainability and social responsibility. This paper investigates the effect of ESG performance on the corporate present and future value of top global tech leaders for a period of eight years (2010 to 2017). Panel data techniques such as the fixed effects model and random effects model based on the Hausman test were used to observe this relationship. Earnings per share (EPS) and the price-to-earnings ratio (PE ratio) were used as a measure of firm current and future value, respectively. The results revealed that ESG has a significantly positive association with both proxies of corporate value of the top global tech companies. However, as compared to EPS, it had a more pronounced impact on the PE ratio of the sampled firms. Unlike many earlier studies that claimed that the ESG score impacts firm performance in the corresponding period, the present research is novel, as it asserts that investors are not only benefiting from firms’ higher investment in ESG through an increase in EPS but are also highly optimistic about the future performance of the firm and thus are paying more for each dollar of earnings. These finding contribute to the existing body of literature on the ESG and firm value nexus and are supported by the stakeholder theory of corporate social responsibility. Thus, policymakers for the tech sector should pay keen attention to firms’ ESG performance to earn the long-term trust of shareholders.
... Yet, because these firms had no history of guidance prior to the lawsuit, this means that litigation would need to push these firms to take on a new commitment to providing guidance-not just an adjustment within their existing policy. Research suggests that the marginal cost of initiating a commitment to guidance may exceed the anticipated benefit (Balakrishnan et al. 2014;Clinch and Verrecchia 2015). Thus this shifts the focus from the intensive margin (i.e., guidance frequency) to the extensive margin (i.e., likelihood of becoming a guider) for this nonguiding subsample. ...
Research suggests that earnings-disclosure-related litigation causes managers to reduce subsequent disclosure, perhaps stemming from a belief that even their good faith disclosures will cause them trouble. This paper considers unexplored dimensions of disclosure and alternative channels of disclosure to provide additional evidence that speaks to how litigation shapes managers’ disclosure strategies. Consistent with Skinner (1994)’s classic legal liability hypothesis, we find that, while managers reduce and delay forecasts of positive earnings news following litigation, they increase the frequency and timeliness of their bad news forecasts. Moreover, many managers who were nonguiders prior to facing legal scrutiny begin guiding following litigation. Managers also maintain (if not increase) the information they provide via press releases and during conference calls following litigation. Supporting the notion that managers use disclosure to walk down expectations, additional analyses document an increase in the likelihood that lawsuit firms report earnings that beat consensus forecasts in the post-lawsuit period. Collectively, our evidence suggests that following litigation managers continue to view disclosure as a valuable tool that shapes their firms’ information environments and reduces expected legal costs. In so doing, it supports an important alternative viewpoint of how firms respond to litigation as well as the effectiveness of litigation as a disciplining mechanism.
... economic link (or causal relation) does not exist. Second, assuming disclosure does indeed reduce the cost of capital as hypothesized, we would expect firms to respond with disclosure when there are cost-of-capital shocks (Leuz and Schrand [2009], Clinch and Verrecchia [2014]). Thus, in a cross-sectional study, one easily obtains a positive, rather than negative relation between disclosure and the cost of capital. ...
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research. This article is protected by copyright. All rights reserved
... For example, Johnstone (2014) shows that if information also changes the assessments about the mean of firm value, the cost of capital can increase when information precision increases. As another example, Clinch and Verrecchia (2011) show that the cost of capital can increase if disclosure increases because of a voluntary choice (instead of a commitment to more transparency as shown in Lambert et al., 2007). Thus, the direction of the relation depicted in link L1 is ultimately an empirical question. ...
This paper examines whether and how inside ownership mediates the relation between disclosure quality and the cost of capital. Both ownership and more transparent reporting have the potential to align incentives between managers and investors thereby reducing systematic risk. Employing a large global sample across 35 countries over the 1990 to 2004 period, we show that country-level disclosure regulation is negatively related to (i) inside ownership, and (ii) firms’ implied cost of capital and realized returns. We then introduce ownership into the cost-of-capital model, and also find a negative relation. These relations extend to the systematic component of the cost of capital, estimated from Fama-French portfolio sorts on ownership and disclosure regulation. Thus, while the direct effect of disclosure on cost of capital is negative, the indirect effect via ownership is positive, consistent with disclosure quality and ownership acting as substitutes. Using path analysis to assess the relative magnitude, our estimates suggest that the direct effect of disclosure quality outweighs the indirect effect by a ratio of about five to one.
... Prior literature emphasizes that it is a sustained commitment to disclosure that affects a firm's information environment (Diamond and Verrrecchia 1991;Leuz and Verrecchia 2000;Clinch and Verrecchia 2013). Recent evidence indicates that it is costly to discontinue guidance, as announcements of stoppage are associated with significant drops in share price and assumptions of negative future earnings news by analysts (Houston, Lev and Tucker 2010;Chen, Matsumoto and Rajgopal 2011). ...
Prior work finds that managers beneficially time their purchases, but not sales, prior to forecasts. Focusing on if (as opposed to when) a forecast is given, we link insider selling to silence in advance of earnings disappointments. This raises the question of whether the absence of incriminating trading drives reductions in litigation risk potentially attributed to warnings. We find that the absence of a warning combined with the presence of selling exacerbates the consequences associated with the individual behaviors. Yet, selling prior to a warning typically does not offset all of the warning's benefit. In so doing, we supply the first robust evidence of a litigation benefit associated with warning.
We show that information complementarities play an important role in the spillover of transparency shocks. We exploit the revelation of financial misconduct by S&P 500 firms, and in a “Stacked Difference‐in‐Differences” design, find that the implied cost of capital increases for “close” industry peers of the fraudulent firms relative to “distant” industry peers. The spillover effect is particularly strong when the close peers and the fraudulent firm share common analyst coverage and common institutional ownership, which have been shown to be powerful proxies for fundamental linkages and information complementarities. We provide evidence that increase in the cost of capital of peer firms is due, at least in part, to “beta shocks” (Lambert et al. [2007], Leuz and Schrand [2009]). Disclosure by close peers – especially those with co‐coverage and co‐ownership links – also increases following fraud revelation. While disclosure remains high in the following years, the cost of equity starts to decrease.
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How corporate strategic disclosure affects investor evaluations is a crucial and widely discussed question. Although prior literature has spent efforts analyzing the information effect of strategic alliances on investor reactions, whether this effect can extend to the cost of equity capital still needs to be explored. Using data from China's A-share listed firms from 2007 to 2021, we examine the impact of disclosing strategic collaborative agreements on equity capital costs. We find that disclosing strategic collaborative agreements relates to lower equity capital costs. These results hold after several robustness checks. The Mechanism test reveals that announcing strategic collaborative agreements alleviates equity capital costs mainly through the information effect. Moreover, this effect is more salient in firms with lower agency costs, lower media coverage, positive media sentiment, and higher media quality. These findings suggest that strategic collaborative agreements provide investors with valuable information.
We examine the joint response to political uncertainty along two margins: changes in real activity and voluntary disclosure. We focus on within‐firm variation in exposure to ex ante competitive U.S. gubernatorial elections using data on preelection poll margins and firms’ state exposures. Despite real activity falling in the years leading up to a close election, we find that voluntary disclosure increases both in frequency and content, including mentions of risk in filings that reference states holding elections. Our tests use a decomposition of 8‐K filings into real activity and voluntary disclosure to address the endogenous complementarity between these two responses. These results hold when using alternative ex ante measures of political uncertainty based on term‐limited incumbents, historically competitive offices, or state legislature gridlock. Both effects of political uncertainty are stronger for firms in highly regulated industries and weaker for those least exposed to the local market, linking the real activity and disclosure responses to uncertainty.
Purpose
The author in this paper identifies the gap between analytical and empirical studies regarding the relation between disclosure and cost of capital. Distinct from prior reviews, this paper focuses on the various assumptions of theoretical models and the insights and key results derived from those assumptions. The author also reviews how these theoretical papers are “applied” in empirical studies.
Design/methodology/approach
The author systematically analyzes both theoretical and empirical papers that investigate disclosure and cost of capital between 2000 and 2020.
Findings
The author shows (1) that there is ample room for theorists to move from the pure exchange economy to the production-based economy setting to investigate the real effect of disclosure on the cost of capital; (2) structural estimation, although still nascent, is a promising direction to build the bridge between analytical and empirical studies in disclosure and cost of capital, and (3) besides ordinary least squares (OLS) regressions, researchers are encouraged to think outside the box regarding how to investigate the interplay between disclosure and cost of capital via a Deep Neural Network design.
Originality/value
The author provides a unique perspective and synthesized knowledge in the relations of disclosure and cost of capital.
This article investigates whether firms commit ex-ante to higher levels of investment transparency and the impact of transparency on stock returns and information asymmetry. We construct a novel measure of investment transparency based upon the extensiveness of profitability forecasts and cost disclosures in new project-level capital investment announcements. Using cross-sectional regression, we find that prior to announcement greater investment transparency is associated with lower information asymmetry. We further show that rather than reporting information strategically on a project-by-project basis, managers commit ex-ante to a disclosure policy that influences the disclosure level of new project announcements, and that a firm-level commitment to fuller disclosure reduces information asymmetry in the days surrounding the announcement. Using event study methodology, we also find that investors react more positively to announcements displaying greater investment transparency.
JEL Classification
G14, D83, G31, G30, G38
This study examines the impact of corporate governance mechanisms on a firm’s cost of equity. The corporate governance mechanisms examined consist of board size, board independence, CEO duality, multiple directorships held by board members, and board political influence. To accomplish the study objective, 210 firm-year observations for manufacturing companies listed on Amman Stock Exchange (ASE) in the period 2014–2018 are analyzed using panel data analysis techniques. The results of the fixed effects regression model reveal that CEO duality and board political influence negatively affect the cost of equity, while there is no significant effect of board size, board independence, and multiple directorships on the cost of equity. The results suggest that firms’ board of directors is an important factor in mitigating the agency problem suggested by Jensen and Meckling (1976). They also suggest that information risk is priced, which is consistent with previous research such as Easley, Hvidkjaer, and O’Hara (2002), and that the board of directors plays a role in reducing that risk in capital markets.
Çalışmada işletmelerin zorunlu açıklamalara ek daha fazla özel bilgiyi gönüllü olarak kamuya açıklamalarının çeşitlendirme yoluyla azaltılamayan sistematik risk üzerindeki etkisi tespit edilmeye çalışılmıştır. Havuzlanmış regresyon yöntemi ile yapılan analiz sonucunda işletmelerin zorunlu açıklamalara ek olarak gönüllü açıklama seviyelerini artırdıklarında azalan belirsizlik nedeni ile işletmeye ait sistematik riskin azaldığı bulgusuna ulaşılmıştır.
We examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015, the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro‐Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid‐ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell‐side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor‐relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.
Using a novel Economic Policy Uncertainty (EPU)’s firm-level political risk index as a proxy for political risk and uncertainty firms face, we examine the impact on the cost of equity and dividend payouts policy of firms. The paper aims to shed light on transitional implications of Shari’ah compliance on firms exposed to firm-level political risk. We analyse if adoption of Shari’ah Compliance Requirements (SCR) mitigates firm-level political risk and impacts the cost of equity and dividend policy. Our benchmark results show that a 1% increase in exposure to political risk contributes to a rise in the cost of equity capital by 0.1 % and in dividend payout by 5%. We find that Shari’ah compliance eventually leads to a fall in the cost of equity and in dividend payouts, despite exposure of the firm to political risk. Our findings have important policy implications that are relevant to Shari’ah compliant equities and beyond.
The firm's operating leverage is its ratio of fixed to variable costs. It is widely understood that production settings with higher fixed costs and lower variable costs are high risk. Well‐rehearsed CAPM arguments show how the firm's beta and cost of capital is higher when its proportion of fixed costs is higher. Importantly, that generalization holds under CAPM if expected total costs are constant and merely re‐apportioned between fixed and variable, but does not hold if expected total costs change. In actual business contexts, higher fixed costs are intended to bring lower unit variable costs and often lower expected total costs. Allowing for such efficiency gains, the firm's risk‐adjusted cost of capital might typically fall despite the higher operating leverage. Formal proof follows directly from the payoffs or ‘certainty equivalent’ expression of CAPM. The CAPM insights and new CAPM equations brought to light in this proof are surprising and useful.
This study uses a machine learning approach to identify and predict factors which influence citation impacts across five Pacific Basin journals: Abacus, Accounting & Finance, Australian Journal of Management, Australian Accounting Review and the Pacific Accounting Review from 2008 to 2018. The machine learning results indicate that citation impact is mostly influenced by: length of a journal article; the field of research (particularly environmental accounting), sample size; whether the sample is local or international; choice of research method (e.g., archival vs survey/interview); academic rank of the first author; institutional status of the first author; and number of authors of the article. The results may be useful for predicting future trends in citation impact as well as providing strategies for authors and editors to improve citation impact.
Purpose
This study aims to examine the relationship between online financial disclosure (OFD) and profitability of Islamic banks in the Gulf Cooperation Council Countries.
Design/methodology/approach
An extensive review of the literature was carried out, and a checklist of 90 items (71 for content and 19 for presentation) was adopted to measure the level of online financial disclosure for the Islamic banks that are listed on the Gulf Cooperation Council stock exchanges. Additionally, the study used three indicators to measure profitability, namely return on equity (ROE), return on assets (ROA) and earnings per share (EPS).
Findings
The findings show that the overall online financial disclosure by Islamic banks in the GCC is 72.5%, and a negative and insignificant relationship between OFD and profitability.
Practical implications
The study recommends that regulatory bodies should develop a guideline of disclosing information through the internet in order to enhance the transparency and performance among Islamic banks which leads to reasonable economic decision making.
Originality/value
The study contributes to the financial reporting and the Islamic economy literature relating to the Gulf Cooperation Council countries as previous studies gave no attention to Islamic banks.
As informed traders, short sellers enhance the informativeness of stock prices, especially related to bad news, potentially reducing the benefits and increasing litigation and reputational costs of withholding bad news by managers. We exploit a quasi-natural experimental setting provided by the introduction of SEC regulation SHO (Reg-SHO), which significantly reduced the constraints faced by short sellers for an effectively randomly selected subsample of U.S. firms (pilot firms). Relative to control firms, we find pilot firms increase the likelihood of voluntary bad news management forecasts, provide these forecasts in a more timely manner, and accelerate the release of quarterly bad earnings news. Each of these effects is stronger for subsamples of moderate (compared with extreme) bad news, firms facing high (relative to low) litigation risks, and firms with a forecasting history. Similar effects are not observed for voluntary good news forecasts. A range of robustness tests reinforce our results.
JEL Classifications: G14; D22; K22; K41; M40.
This paper addresses two important areas of voluntary disclosure for Hong Kong IPOs: (1) The risk factors surrounding a listing entity’s business and offer and (2) an issuer’s planned use of proceeds. Issuers assigning a greater fraction of proceeds to investment (debt repayment) generate higher (lower) subscription rates, price ‘fixings’ and after-market liquidity levels, as well as more (less) robust initial and longer-run returns. Greater enumeration of issue-based risk factors inflates after-market volatility but exerts little influence on other initial pricing characteristics. In contrast, enumerations on business and global risk factors bear strong negative association with longer-run returns. Additionally, risk factor enumeration and debt repayments are increasing in underwriter quality. However, such disclosures exhibit weak connection with state ownership.
We examine the association between a firm's cost of capital and its voluntary and mandatory disclosures. We include two types of mandatory disclosures: those are a function of periodic reports that are realizations of ex‐ante reporting systems and those arise due to specific corporate events. To capture a firm's voluntary and event‐driven mandatory disclosures, we use information it provides via 8K filings. To capture its periodic mandatory disclosures, we use earnings quality measures derived from the literature. Consistent with endogenous relations predicted by theory, we find that voluntary disclosure and both types of mandatory disclosure are correlated, although only event‐driven mandatory disclosures are significant in models that explain voluntary disclosure. We also find that the cost of capital is generally influenced by each of these disclosure types. We also find that controlling for periodic mandatory disclosure does not affect the relation between voluntary disclosure and the cost of capital, while controlling for event‐driven mandatory disclosure sometimes affects the relation depending on the measures used. Our study suggests that a firm's disclosure environment includes the three types of disclosures examined, although the inclusion of mandatory disclosures does not affect the measured association between voluntary disclosure and the cost of capital.
This article is protected by copyright. All rights reserved
We analyze a model of voluntary disclosure where investors impose a discount for uncertainty about firm value. We find that a commitment to conservative reporting, defined as a requirement that firms disclose bad realizations of economic events, results in firm prices being higher, on average. Intuitively, in the absence of mandatory disclosure requirements, managers have incentives to disclose voluntarily information about good realizations and withhold information about bad realizations. Thus, a financial reporting system that requires timely reporting of low realizations results in lower uncertainty and higher firm value. Importantly, we interpret a commitment to conservative reporting to include not only reported earnings, but, more broadly, any mechanism that commits managers to disclose, such as required footnotes and explanations in corporate filings. Beyond a capital market setting, our model also applies to other adverse selection settings, including governance, litigation, and debt contracting, where timely disclosure of bad news improves efficiency.
JEL Classifications: M4.
We study a firm’s manager’s voluntary disclosure decisions and those disclosure decisions’ asset pricing, cost of capital, and information transfer effects in a model where investors trade multiple securities. We: develop new asset pricing formulas when the manager makes no disclosure that impose testable cross-equation restrictions on firms’ market values; develop a wide array of comparative statics; obtain surprising findings about nondisclosure’s effects on investors’ perceptions of uncertainty about firms’ future cash flows; develop simple, interpretable expressions for firms’ cost of capital; and show how no disclosure by one firm generates informational externalities on other firms.
Under the principles of Disclosure Theory, the study aims at analyzing the association between
the disclosure level of market risk factors and the cost of capital of companies listed on “Novo
Mercado” and segments 1 and 2 of corporate governance of BM&FBovespa. The research differs
from most studies because it analyzes both the cost of equity capital as cost of capital debt. It also
stands out the relevance of disclosure of risk factors for capital market efficiency. We evaluated
the data of 151 companies for the financial year 2014, using the correspondence analysis and
the multiple linear regression. The disclosure level of market risk factors of the sample companies
was identified from their respective reference forms, and the data of the cost of capital were
extracted from Economática® base. It was verified that the disclosure level of market risks of
the companies indicates a positive relation with the cost of capital debt, represented by Kd. No
relation was found between the level of disclosure and the cost of equity capital, measured by Beta of the companies. The results indicate the low maturity of the Brazilian capital market to
deal with the principles of the Theory of Disclosure, for which disclosure, despite the adverse
effect, provides more credibility.
In deciding how much customer information to disclose, managers face a tradeoff between the benefits of reducing information asymmetry and the losses of revealing proprietary information. This paper investigates which factors affect the level of ambiguous customer identity disclosure and whether such ambiguous disclosure affects the cost of equity capital. The empirical evidence shows that the proprietary cost is a crucial factor in ambiguous customer identity disclosure. Firms with a higher level of ambiguous customer identity disclosure generate a higher cost of equity capital. Moreover, the higher cost of equity capital is concentrated among firms under imperfect market competition.
This article offers a survey of theoretical research on disclosure and the cost of capital. We summarize the current state of the literature and discuss the channels through which information affects the cost of capital. After giving an overview of asset pricing theory, we examine the rationale for an accounting risk factor or an ex-ante effect of information on the cost of capital. Then, we discuss the role of voluntary disclosure, heterogenous beliefs, investor base, liquidity shocks, earnings management, and agency problems as determinants of the cost of capital. Linkages between productive decisions and the cost of capital, and their implication for investor welfare, are also examined.
A estrutura de capital, apesar de exaustivamente discutida na literatura de Finanças, ainda tem
intrigado os pesquisadores, pois seus achados, sobretudo no contexto brasileiro não
apresentam consistência suficientes para se considerar esgotado o debate. Além disso,
questões como a dispersão das fontes de financiamento utilizadas pelas empresas tem
estimulado a realização de pesquisas, pois fatores econômicos e institucionais podem
estimular uma maior ou menor dispersão dos tipos de dívida (Hackbarth, Hennesy e Leland,
2007). Adicionalmente, o nível de transparência é um dos fatores com efeitos potenciais sobre
a dispersão das fontes de financiamento, pois o maior ou menor acesso às linhas de créditos
pode se relacionar com o nível de assimetria entre usuários internos e externos (Verrecchia,
2001). Nesse contexto, o objetivo do presente estudo foi analisar o efeito do nível de
transparência sobre a heterogeneidade (homogeneidade) das fontes de financiamentos das
empresas brasileiras. Para tanto, analisou-se dados de 49 empresas divididas em dois grupos
(ganhadoras e não ganhadoras do Prêmio de Transparência ANEFAC-SERASAEXPERIAN).
Os dados coletados na BMF&BOVESPA e CVM foram analisados
quantitativamente através da estatística descritiva e inferencial, especificamente, análise de
regressão com dados em painel. Os resultados demonstraram que o nível de transparência
afeta negativa e significativamente na homogeneidade. Quanto mais transparente, mais
heterogênea é a distribuição das fontes de capitais de terceiros. Esses achados sugerem uma
maior confiança dos credores e/ou uma preferência dos gestores pela lógica da Trade-off
Theory implica em uma busca por uma maximização dos benefícios das dívidas e redução dos
custos de falência podem estar associados aos resultados encontrados. Complementarmente, o
nível de risco das empresas tem um efeito positivo na heterogeneidade das fontes de
financiamento, ou seja, quanto mais arriscada, maior é o número de tipos de dívidas
contratadas dentre as diversas opções no mercado financeiro.
Studies investigating market reactions to changes in capital structure aim to find the impact of private information conveyed. However, these studies ignore that financial decisions are not made randomly but are conditional on managers’ private information. Using a sample of U.S. leverage-increasing public companies with public long-term debt offerings, we find that debt offerings convey no new information to the markets after considering the conditionality of decisions. We also show that results can be biased if the deterministic role played by private information ex ante is omitted, which may explain the conflicting valuation evidence found in the literature.
In this paper, we review scholarly accounting research published within the Asia Pacific Region by analysing nine of the main accounting journals within the region along five dimensions. The nine journals we focus on are: Accounting, Auditing and Accountability Journal; Australian Accounting Review; Abacus; Accounting and Finance; Australian Journal of Management; Accounting Research Journal; Journal of Contemporary Accounting and Economics; Managerial Auditing Journal; and Pacific Accounting Review. The five dimensions we consider are: the most frequently cited papers; topical coverage; impact on practice; research method; and noted authors. Our review leads us to conclude that the accounting journals published within the Asia Pacific region make a significant contribution to research and practice both within the region and internationally.
We examine two potential mechanisms through which disclosure quality is expected to reduce information asymmetry: (1) altering
the trading incentives of informed and uninformed investors so that there is relatively less trading by privately informed
investors, and (2) reducing the likelihood that investors discover and trade on private information. Our results indicate
that the negative relation between disclosure quality and information asymmetry is primarily caused by the latter mechanism.
While information asymmetry is negatively associated with the quality of the annual report and investor relations activities,
it is positively associated with quarterly report disclosure quality. Additionally, we hypothesize and find that that the
negative association between disclosure quality and information asymmetry is stronger in settings characterized by higher
levels of firm-investor asymmetry.
This paper provides evidence on the relation between the timeliness of voluntary earnings disclosures and the outcomes of related stockholder litigation. Like Francis Philbrick and Schipper (1994a) I find that many lawsuits result from voluntary disclosures of adverse earnings news. However I also document that: (1) many voluntary earnings disclosures are not made on a timely basis; (2) less timely voluntary disclosures result in more costly lawsuit outcomes; (3) a simple model that predicts that lawsuits occur if large firms release adverse earnings news on earnings announcement dates works well in predicting stockholder litigation. Overall it seems lawsuit outcomes depend at least to some degree on the "merits" of stockholders' claims so that managers can benefit by making more timely earnings disclosures.
This paper examines the association between the cost of equity capital and levels of annual report and timely disclosure, and investor relations activities. We estimate the cost of equity capital using the classic dividend discount model. We find that the cost of equity capital decreases in the annual report disclosure level but increases in the level of timely disclosures. The latter result is contrary to theory but is consistent with managers' claims that greater timely disclosures may increase the cost of equity capital, possibly through increased stock price volatility. We find no association between the cost of equity capital and the level of investor relations activities. We conclude that aggregating across different disclosure types results in a loss of information. Failing to include all disclosure types in regression analyses may lead to a correlated omitted variable bias and erroneous conclusions.
Based on a stylized infinite-period and multi-asset model of a securities market, I discuss several aspects of the link between disclosure quality and cost of capital, with a particular focus on how diversification influences this link. I first show that because investors have finite horizons and thus face price risk, disclosure plays a role in determining ex ante cost of capital in such a setting, contrary to the result of Christensen et al. ((2010) Information and the cost of capital: An ex ante perspective. Accounting Review 83: 817-848). With respect to diversification, I highlight the role of three aspects of a ‘large economy’ that influence how disclosure quality affects cost of capital: (1) the number of firms across which risk is distributed; (2) the number of investors among whom this risk is shared; and (3) the number of information signals (disclosures) available to investors from which to extract information. Finally, I extend the model to include the effects of nonrational traders who follow a simple trading heuristic and show that this results in an additional disclosure-contingent factor in equilibrium price that does not diversify away under fairly general conditions.
This paper addresses the question of whether cost of capital is a sufficient statistic for the welfare of current and/or new investors in the analysis of the economic consequences of disclosure quality. I identify the necessary and sufficient conditions under which disclosure quality reduces cost of capital and improves the welfare of current and new investors. Then, I show that these conditions are not equivalent, nor do they subsume each other. Disclosure quality affects both the average level and the strategic uncertainty of investors' payoffs from trading, but cost of capital measures only the endogenous compensation for the risk of a firm's cash flow. Since it captures neither the average level nor the strategic uncertainty of the payoffs of current and new investors, cost of capital does not summarize the impact of disclosure quality on the welfare of either current or new investors. These results may help interpret the mixed empirical findings on the relationship between disclosure quality and cost of capital, inform the empirical efforts to measure the economic consequences of accounting disclosure, and add to the ongoing debate on the reform of financial reporting and disclosure regulation.
It is widely believed that disclosure quality improves investors' welfare by reducing cost of capital in a competitive market. This paper examines this conventional wisdom by studying a production economy in which disclosure influences a firm's investment decisions. I demonstrate three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or new investors. Finally, cost of capital is not a sufficient statistic for the effects of disclosure quality on the welfare of either current or new investors. These results may help interpret the mixed empirical findings on the relation between disclosure quality and cost of capital, inform the empirical efforts to measure the economic consequences of accounting disclosure, and add to the ongoing debate on the reform of financial reporting and disclosure regulation.
This paper explores the links between firms' voluntary disclosures and their cost of capital. I relate the differences in costs of capital between disclosing and non- disclosing firms to disclosure frictions and equity risk premia. Specifically, I show that firms that voluntary disclose their information have a lower cost of capital than firms that do not disclose. I also examine the extent to which reductions in cost of capital map into improved risk-sharing and/or greater productive efficiency. I prove that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. Economic efficiency decreases as the disclosure friction increases be- cause of inefficient production in an underinvestment equilibrium. As the disclosure friction continues to increase, the equilibrium switches to overinvestment and further increases in the disclosure friction improve risk-sharing. Importantly the relation be- tween average cost of capital and economic efficiency is ambiguous. A decrease in average cost of capital in the economy only implies an increase in economic effi-
The effect of disclosure level on the cost of equity capital is a matter of considerable interest and importance to the financial reporting community. However, the association between disclosure level and cost of equity capital is not well established and has been difficult to quantify. In this paper I examine the association between disclosure level and the cost of equity capital by regressing firm-specific estimates of cost of equity capital on market beta, firm size and a self-constructed measure of disclosure level. My measure of disclosure level is based on the amount of voluntary disclosure provided in the 1990 annual reports of a sample of 122 manufacturing firms. For firms that attract a low analyst following, the results indicate that greater disclosure is associated with a lower cost of equity capital. The magnitude of the effect is such that a one-unit difference in the disclosure measure is associated with a difference of approximately twenty-eight basis points in the cost of equity capital, after controlling for market beta and firm size. For firms with a high analyst following, however, I find no evidence of an association between my measure of disclosure level and cost of equity capital perhaps because the disclosure measure is limited to the annual report and accordingly may not provide a powerful proxy for overall disclosure level when analysts play a significant role in the communication process.
Serafeim [2011] examines the determinants and economic consequences of embedded value (EV) reporting, a voluntary disclosure arrangement in the life insurance industry. He finds substantial reductions in bid-ask spreads for EV reporting firms, and links the occurrence of this disclosure practice to the nature of competition in the insurance business. In my discussion, I focus on two aspects of his hypothesis development: (1) does EV reporting give rise to a credible commitment to transparency? (2) What are the country-level determinants of EV reporting? First, on a conceptual level, I highlight the distinction between an ex ante commitment to transparency and ex post voluntary disclosure. To illustrate my point, I examine the change in information asymmetry around various voluntary disclosure choices with varying degrees of commitment. I find a reduction in bid-ask spreads following U.S. cross-listings and the voluntary adoption of IFRS, but not after a switch to a Big Five auditor. These results let me gauge the magnitude of the effects for EV reporting. Second, I discuss the notion of complementarities among the elements of a country’s institutional environment. I then empirically show that institutional forces likely act both ways, i.e., from a single industry to the rest of the economy and vice versa, and that EV reporting is not independent from other voluntary commitment devices in a country. In sum, my findings underscore the importance of (and difficulties in) cleanly identifying the determinants and effects of voluntary disclosure choices.
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock created by the Enron scandal in Fall 2001 and analyze firms' disclosure responses to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate concerns about omitted variables in traditional cross-sectional disclosure studies. We estimate shocks to firms' betas around the Enron events and the ensuing transparency crisis. Our analysis shows that these beta shocks are associated with increased disclosure. Firms expand the number of pages of their annual 10-K filings, notably the sections containing the financial statements and footnotes. The increase in disclosure is particularly pronounced for firms that have positive cost of capital shocks and larger financing needs. We also find that firms respond with additional interim disclosures (e.g., 8-K filings) and that these disclosures are complementary to the 10-K disclosures. Finally, we show that firms' disclosure responses reduce firms' costs of capital and hence the impact of the transparency crisis.
I investigate the determinants and economic consequences associated with financialreporting quality. I find evidence of a positive association between investors demands for firm-specific information and financial reporting quality. In addition, the evidence suggests that higher proprietary costs (proxied by capital intensity, product market competition, and growth opportunities) are associated with a lower quality of financial information. Controlling for the firm-specific characteristics determining financial reporting quality, I find evidence of a negative association between firms total risk and financial reporting quality. Decomposing total risk into a systematic component and an idiosyncratic one, the results imply that firms providing financial information of higher quality do not necessarily enjoy a lower cost of equity capital. However, a significant negative relation is documented between reporting quality and idiosyncratic risk. Thissuggests that the quality of accounting information cannot be characterized as anadditional systematic priced risk factor, but rather as an idiosyncratic one, once the firmspecific characteristics determining information quality are controlled for. These results demonstrate the importance of explicitly controlling for the determinants of financial reporting quality when investigating the associated economic consequences and question recent empirical evidence on the association between reporting quality and the cost of equity capital.
ABSTRACTI analyze Embedded Value (EV) reporting by firms with life insurance operations to assess the impact of unregulated financial reporting on transparency and to examine the institutional characteristics that promote unregulated reporting. Under EV accounting, the present value of future cash flows from in-force contracts is included in shareholders’ equity, and profit is calculated as the change in equity between two periods. In contrast to Generally Accepted Accounting Principles (GAAP), this approach produces higher shareholder's equity and recognizes income at contract inception. I find firms that adopt EV reporting exhibit a decline in information asymmetry, with the decline increasing as EV reporting evolves to address methodological deficiencies and to permit more comparability across firms. The decrease in information asymmetry is contingent on providing an audit certification, and larger for firms that commit to providing EV reports. Moreover, I document that EV reporting is more widespread in countries with more hostile takeovers, managers that do not avoid volatile income measures, regulators that are less likely to intervene in the product market, and analysts that believe EV disclosure increases the value of their information intermediation function.
Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.
This paper provides evidence on whether managers can reduce stockholder litigation costs by disclosing adverse earnings news ‘early’. Inconsistent with this idea, I find that voluntary disclosures occur more frequently in quarters that result in litigation than in quarters that do not. However, this result occurs because managers' incentives to predisclose earnings news increase as the news becomes more adverse, presumably because this reduces the cost of resolving litigation that inevitably follows in bad news quarters. After controlling for these incentives using estimated stockholder damages, I find some evidence that more timely disclosure is associated with lower settlement amounts.
Recent articles have demonstrated that increased public disclosure can decrease firms' cost of capital. The focus has been on the impact of information on the cost of capital subsequent to the release of the information (the ex post cost of capital). We show that the reduction in the ex post cost of capital is offset by an equal increase in the cost of capital for the period leading up to the release of the information (the preposterior cost of capital). Thus, within the class of models framing the recent discussion, there is no impact on the ex ante cost of capital covering the full time span of the firm. The extent to which information is made publicly or privately available affects the timing of the resolution of uncertainty and when the information is reflected in equilibrium prices, but there is no impact on initial equilibrium prices. Within a noisy rational expectations equilibrium, rational investors may actually benefit from a higher ex post cost of capital.
We consider the release of information by a firm when the manager has discretion regarding the timing of its release. While it is well known that firms appear to delay the release of bad news, we examine how external information about the state of the economy (or the industry) affects this decision. We develop a dynamic model of strategic disclosure in which a firm may privately receive information at a time that is random (and independent of the state of the economy). Because investors are uncertain regarding whether and when the firm has received information, the firm will not necessarily disclose the information immediately. We show that bad news about the economy can trigger the immediate release of information by firms. Conversely, good news about the economy can slow the release of information by firms. As a result, the release of negative information tends to be clustered. Surprisingly, this result holds only when firms can preempt the arrival of external information by disclosing their own information first. These results have implications for conditional variance and skewness of stock and market returns.
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporting regime.
ABSTRACT In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the firm's assessed covariances with other firms' cash flows, which is nondiversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.
This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk-bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making. Copyright 1991 by American Finance Association.
This article proposes a theory of corporate transparency and its determinants. We show that under imperfect product market competition, the corporate transparency decision affects the value of equity and debt claims differently. We then embed this insight in a model of endogenous investor influence in which banks may emerge as dominant investors. In line with evidence from continental Europe and Japan, we find that dominant creditors seek to decrease transparency below the level preferred by equity holders. The theory predicts a clustering of firm characteristics that emerge when capital markets are not sufficiently investor friendly to allow arm's-length monitoring: bank dominance, opaqueness, uncertainty about assets in place, low variability of profits, and reduced average profits.
We investigate the role of information in affecting a firm's cost of capital. We show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio to incorporate new information, and uninformed investors are thus disadvantaged. In equilibrium, the quantity and quality of information affect asset prices. We show firms can influence their cost of capital by choosing features like accounting treatments, analyst coverage, and market microstructure. Copyright 2004 by The American Finance Association.
The choice of an individual decision maker among alternative risky ventures may be regarded as a two-step procedure. The decision maker chooses an efficient set among all available portfolios, independently of his tastes or preferences. Then, the decision maker applies individual preferences to this set to choose the desired portfolio. The subject of this chapter is the analysis of the first step. It deals with optimal selection rules that minimize the efficient set by discarding any portfolio that is inefficient in the sense that it is inferior to a member of the efficient set, from point of view of each and every individual, when all individuals' utility functions are assumed to be of a given general class of admissible functions. The analysis presented in the chapter is carried out in terms of a single dimension such as money, both for the utility functions and for the probability distributions. However, the results may easily be extended, with minor changes in the theorems and the proofs, to the multivariate case. The chapter explains a necessary and sufficient condition for efficiency, when no further restrictions are imposed on the utility functions. It presents proofs of the optimal efficiency criterion in the presence of general risk aversion, that is, for concave utility functions.
This paper examines the association between the cost of equity capital and levels of annual report and timely disclosure, and investor relations activities. We estimate the cost of equity capital using the classic dividend discount model. We find that the cost of equity capital decreases in the annual report disclosure level but increases in the level of timely disclosures. The latter result is contrary to theory but is consistent with managers’ claims that greater timely disclosures may increase the cost of equity capital, possibly through increased stock price volatility. We find no association between the cost of equity capital and the level of investor relations activities. We conclude that aggregating across different disclosure types results in a loss of information. Failing to include all disclosure types in regression analyses may lead to a correlated omitted variable bias and erroneous conclusions.
We investigate the role of information-based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information-based trading, and we estimate this measure using data for individual NYSE-listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset-pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information-based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year. Copyright The American Finance Association 2002.