Disclosure Quality, Cost of Capital, and Investors' Welfare

Gao, Pingyang

doi:10.2139/ssrn.1156407

Cited by 15 publications

(24 citation statements)

References 64 publications

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“…For example, Proposition 2 inLambert et al (2007), and Theorem 1 inChristensen et al (2010) both detail an inverse link between exogenously specified disclosure quality and cost of capital measured at the date of disclosure. Similary, Proposition 3 ofEasley and O'Hara (2004) details an inverse link between an exogenously specified amount of public (versus private) information disclosed and cost of capital Gao's (2010). Proposition 1 derives a possibly non-monotonic link between disclosure quality and cost of capital by allowing endogenous production decisions by firms, but with exogenously specified disclosure quality.…”

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confidence: 89%

Voluntary disclosure and the cost of capital

Clinch

Verrecchia

2014

Australian Journal of Management

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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 informs empirical research that ignores endogeneity of disclosure by, for example, omitting the exogenous determinants of disclosure and the discount in price from the regressions employed. Second, we investigate the incremental effect of disclosure on the discount in price: this informs empirical research that controls for the direct effect of exogenous factors on the discount in price by, for example, including the exogenous variables in regression models employed. 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 further informs empirical research 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. AbstractWe investigate the association between voluntary disclosure and the risk-related discount investors apply to price. Prior research indicates that when the analysis is based on a commitment to disclose the association is negative (i.e., more disclosure is associated with a lower discount). Our results suggest that with voluntary, or endogenous, disclosure the association is not necessarily negative, and in most cases the association is positive. This implies that in studies of either the discount or cost of capital, some care should be taken to distinguish endogenous disclosure choice (i.e., voluntary disclosure) from disclosure commitment.JEL classification: G12, G14, G31, M41

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confidence: 89%

Voluntary disclosure and the cost of capital

Clinch

Verrecchia

2014

Australian Journal of Management

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“…However, in Section 2 I briefly discuss some prior research that is directly related to my paper. Also, I restrict my attention to a setting where there is no information asymmetry among investors (in contrast to, for example, Easley and O'Hara (2004) and Lambert et al (2012)), and no 'real effects' of disclosure, that is, a pure exchange economy (in contrast to, for example, the last section in Lambert et al (2007), Gao (2010) and Cai (2013), amongst others).…”

Section: Discussionmentioning

confidence: 99%

Disclosure quality, diversification and the cost of capital

Clinch

2013

Australian Journal of Management

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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 non-rational 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.

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“…Kanodia and Lee, 1998;Kanodia et al 2004;Kanodia, 2008). To date, we have very limited research which links the real effect of disclosure directly to the cost of capital, with the exception of Gao (2010), Zhang (2013) and a handful of voluntary disclosure studies (e.g. Jorgensen and Kirschenheiter, 2003;Cheynel, 2013;Clinch and Verricchia, 2015).…”

Section: Introductionmentioning

confidence: 99%

A real effect across time: disclosure quality, cost of capital and profitability

Cai

2023

JAL

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PurposeIn the presence of “real effects” of disclosure in a production economy, this research aims to investigate the link between disclosure and cost of capital relating to different time periods: namely the post-disclosure cost of capital (the cost of capital subsequent to disclosure), the pre-disclosure cost of capital (the cost of capital for the period leading up to disclosure) and the overall cost of capital (the cost of capital across both periods). The author also extends the analysis to whether and how in the presence of a real effect of disclosure, investors' ex ante welfare might be affected.Design/methodology/approachThis research is conducted via stylized models.FindingsThe author demonstrates that, first, in contrast to findings in a pure-exchange economy, in a production-based economy where disclosure affects firms' investment decisions, both the overall cost of capital and the investors' ex ante welfare can be affected by disclosure quality. As disclosure quality improves, the post-disclosure cost of capital may either increase or decrease, as may the pre-disclosure cost of capital. The change in the post-disclosure cost of capital is not fully offset by the change in the pre-disclosure cost of capital, and therefore the overall cost of capital can either increase or decrease. Second, a firm's profitability of existing and new production are critical factors in determining whether cost of capital increases or decreases with disclosure quality. The author characterizes conditions under which higher disclosure quality increases or decreases the disclosing firm's cost of capital over different time periods. Third, when disclosure affects interrelated firms' production decisions, the disclosing firm's overall cost of capital changes with disclosure quality, even when the marginal (unconditional) distribution of the disclosing firm's cash flow is not affected by the disclosure.Originality/valueThis research contributes to a largely unexplored but important area: the real effect of disclosure on the cost of capital.

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Disclosure Quality, Cost of Capital, and Investors' Welfare

Cited by 15 publications

References 64 publications

Voluntary disclosure and the cost of capital

Voluntary disclosure and the cost of capital

Disclosure quality, diversification and the cost of capital

A real effect across time: disclosure quality, cost of capital and profitability

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