Accounting Papers

Document Type

Journal Article

Date of this Version

2002

Publication Source

European Accounting Review

Volume

11

Issue

4

Start Page

741

Last Page

773

DOI

10.1080/0963818022000001109

Abstract

The relationship between disclosure quality and cost of equity capital is an important topic in today's economy. In general, economic theory and anecdotal evidence suggest a negative association. Empirical work on this link, however, is confronted with major methodological drawbacks – neither disclosure level nor cost of capital can be observed directly – and has documented somewhat confounding results so far. Adopting a finite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm's voluntary disclosure policy on its implied cost of capital. Switzerland seems especially suited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a cross-sectional sample of seventy-three non-financial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8 to 2.4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias – a major concern in disclosure studies – the marginal effect remains of the same direction and even increases in magnitude, although at lower levels of statistical significance. One reason for the strong relationship might be found in differing institutional factors between the US and Swiss capital markets.

Copyright/Permission Statement

This is an Accepted Manuscript of an article published by Taylor & Francis in the European Accounting Review on 10 Nov 2010, available online: http://wwww.tandfonline.com/10.1080/0963818022000001109.

Keywords

voluntary disclosure, disclosure quality, financial reporting, valuation, cost of capital, analysts' behaviour

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Date Posted: 27 November 2017