Disclosure Frequency, Information Environment, and Cost of Capital under Regulation Fair Disclosure in the Korean Market

Abstract

Disclosure policy contributes to improve sustainable corporate information environment by mitigating information asymmetry surrounding companies. Economic theories generally support that more disclosures reduce the level of information asymmetry, increase stock liquidity, and thus decrease the costs of equity capital. However, the effect of corporate disclosure in emerging markets is not clearly predictable because of the potential information leakage prior to disclosure. Considering this issue, this study focuses on the Regulation Fair Disclosure which prohibits selective disclosure. Using the earnings-to-price ratio as a proxy of the costs of equity, the study finds that disclosure frequency is negatively related to the cost of equity capital. However, I do not find evidence that disclosure is negatively related to the implied costs of equity capital (ICOE). The results of the quintile analysis suggest that this inconsistency is attributable to the better information environment of the ICOE sample. The findings of this study have implications for disclosure regulations in emerging markets, given that the existing literature casts doubt on the effectiveness of corporate disclosure in such markets.