Commitment and Cost of Equity Capital: An Examination of Timely Balance Sheet Disclosure in Earnings Announcements

Abstract

In this paper, I examine the relation between disclosure commitment and cost of equity capital using accelerated earnings announcement disclosures as a measure of commitment. In settings characterized by imperfect market competition, I find that firms which consistently disclose balance sheet detail in relatively timely earnings announcements have lower costs of capital compared to other firms. This result is statistically significant and economically meaningful, and is robust to various alternative measurements for cost of capital, and alternative designs addressing endogeneity and underlying information quality. Overall, this result is important because it highlights additional dimensions of disclosure commitment (consistency and timeliness), while incorporating important features from theoretical models (information quality and market competition). In particular, my results suggest that consistency and timeliness are salient features of firms' disclosure behavior that have predictable and robust relations with capital market outcomes. This result is robust to controlling for underlying information quality; however, consistent with theory, it is conditional on low levels of market competition. * Accepted by Partha Mohanram. This paper is based on my doctoral dissertation completed at Duke University. I appreciate the guidance of my dissertation committee: Katherine Schipper (chair), Bob Ashton, Rick Hoyle, Bill Mayew, and Dhananjay Nanda. I have also received helpful comments from Partha Mohanram, Patricia O'Brien, two anonymous reviewers, par l'auteur semblent notamment indiquer que l'uniformit e et la rapidit e sont des aspects marquants du comportement des soci et es, en mati ere de communication d'information, ayant des liens pr evisibles et solides avec les r esultats obtenus sur les march es financiers.Cette conclusion r esiste au contrôle de la qualit e sous-jacente de l'information; toutefois, conform ement a la th eorie, elle est tributaire de faibles niveaux de concurrence sur le march e.

The Effect of Regulation on the Timeliness and Informational Role of Earnings Announcements

“…As a result, managers may have delayed the announcements in the new regulatory environment to allow time to review the figures more thoroughly and ensure that the earnings releases are free of errors before their disclosure. 8 Alternatively, companies have incentives to maintain or accelerate the timeliness of their earnings releases (Johnson and So 2017;Evans 2016). Investors may have interpreted an earnings announcement delay potentially either as a signal that earnings announcements, prior to regulation, were of dubious quality or as an indication of contemporaneous "bad news" (Chambers and Penman 1984;Begley and Fischer 1998;Johnson and So 2017).…”

Corporate Governance, Disclosure Quality, and Cost of Equity: Evidence from Pakistan

“…The company's financing cost using equity increases if there is lag of timely information e.g. (Evans, 2015). Afify (2009) investigated the corporate governance and audit report lags by using 85 Egyptian-listed firms.…”

Corporate Disclosure in Times of Expansionary Monetary Policy.

“…Corporate polices, including disclosure policies, are likely to be more responsive to persistent government policy changes because corporate policies involve some degree of commitment on the part of the firm and frequent changes are generally undesirable and can be costly. The disclosure literature highlights the importance of commitment in corporate disclosure (Leuz and Verrecchia 2000;Houston, Lev and Tucker 2010;Chen, Matsumoto and Rajgopal 2011;Evans 2016;Cao et al 2017). For example, Evans (2016) finds that firms that consistently disclose balance sheet details in relatively timely earnings announcements have a lower cost of capital than do other firms.…”

“…Consequently, persistent monetary policy changes incur more disclosure commitment benefits (Francis, Nanda and Olsson 2008;Born and Pfeifer 2014;Baker, Bloom and Davis 2016;Evans 2016), causing firms to be more likely to adjust their disclosure policies. Second, we examine whether external financing needs influence monetary policy changes' effect on disclosure.…”