Financial Reporting Frequency, Information Asymmetry, and the Cost of Equity

The Impact of Internet Investor Relations on the Cost of Capital: Evidence from Companies Listed on the Johannesburg Stock Exchange

“…The magnitude of the reported adjusted R² of 59.05% and 71.07% compares favourably to studies such as Hail (2002), which report an adjusted R² of 30.6%; Botosan (1997), which reports 13.5%; Froidevaux (2004), which reports 5.39%; Orens et al (2010), which reports 41%; and Fu et al (2012), which reports 14.93%.…”

“…The second category is based on share returns and includes methods such as earnings-to-price, realised returns and the capital asset pricing model (CAPM). Even though Omran and Pointon (2004: 243) advocate that the earnings-to-price ratio is the simplest model to estimate the cost of equity, it is often not used given the difficulty of interpreting a negative ratio (Fu et al 2012;Francis et al 2005b). Realised returns should be an unbiased estimator of the cost of equity in an efficient market (Gebhardt at al.…”

“…Realised returns should be an unbiased estimator of the cost of equity in an efficient market (Gebhardt at al. 2001), but are sometimes described as a 'noisy measure' (Fu at al. 2012) and negative returns are subject to the same interpretation difficulty as the earnings-to-price ratio.…”

“…In defence of the CAPM, Partington (2013) emphasises that the CAPM has clearly passed one very important test, that is, the test of time. Further to being the most preferred method in the valuation practice, it was decided to use the CAPM as a cost of equity estimate in this study for the following reasons: r no consensus exists, but various studies have found a positive association between the beta coefficient and the ex-ante cost of equity (Botosan 1997;Botosan and Plumlee 2002;Hail 2002); r as also previously argued by Hail (2002: 756), the purpose of this study is not to explain the absolute level of the cost of equity, but rather to examine the crosssectional variation in the cost of equity, conditional on the varying observed levels of IIR; r notwithstanding the critique against the CAPM, some empirical support for the CAPM is given by Da et al (2012) and the CAPM is often used to measure the cost of equity in emerging country studies (Collins and Abrahamson 2006;Hearn and Piesse 2015), as well as developed country studies where analyst forecast information was not available (Fu et al 2012); r thin-trading adjusted betas were used. According to Gopi (2016), the adjustment is done using the wellknown trade-to-trade adjustment procedure, as also described by Bradfield (2003); and r ex-ante estimate methods were considered not achievable in this study given the analyst forecast information (e.g., earnings per share projections) prerequisite.…”

Influence of Intellectual Capital Investment, Risk, Industry Membership and Corporate Governance Mechanisms on the Voluntary Disclosure of Intellectual Capital by UK Listed Companies

“…The first is explained by Diamond and Verrecchia (1991) and Fu, Kraft, & Zhang (2012), who suggest that voluntary disclosure of IC reduces information asymmetry between uninformed and informed investors and thus increases the liquidity of the equity in the market, both by reducing information risk and the inherent risk of the security. The second factor relates to the availability of information to analysts; Lang and Lundholm (1996) argue that not all management information is revealed and therefore analysts may invest in information collection costs, however as voluntary disclosure lowers the cost of information acquisition management may be motivated to increase the amount of information available to analysts in order to ensure the quality of the forecasts (Lehavy, Li, & Merkley, 2011).…”