Abstract

http://ssrn.com/abstract=1675002
 
 

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Capital Structure, Cost of Capital, and Voluntary Disclosures


Jeremy Bertomeu


CUNY Baruch College

Anne Beyer


Stanford University - Graduate School of Business

Ronald A. Dye


Northwestern University - Department of Accounting Information & Management

November 3, 2010

Accounting Review 2011, Vol. 86, No. 3

Abstract:     
This paper develops a model of financing that jointly determines a firm's capital structure, its voluntary disclosure policy, and its cost of capital. Investors who receive securities in return for supplying capital sometimes incur losses when they trade their securities with an informed trader. The firm's disclosure policy and the structure of its securities determine the information advantage of the informed trader, and hence the size of investors' trading losses and the firm's cost of capital.

We establish a hierarchy of optimal securities and disclosure policies that varies with the volatility of the firm's cash flows. Debt securities are often optimal, with the form of debt -- risk-free, investment grade, or "junk" -- varying with the firm's cash flow volatility. Though the model predicts a negative association between firms' cost of capital and the extent of information firms disclose, more expansive voluntary disclosure does not cause firms' cost of capital to decline. Mandatory disclosures alter firms' voluntary disclosures, their capital structure choices, and their cost of capital.

Number of Pages in PDF File: 48

Keywords: Capital Structure, Cost of Capital, Voluntary Disclosure

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Date posted: September 11, 2010 ; Last revised: April 21, 2012

Suggested Citation

Bertomeu, Jeremy and Beyer, Anne and Dye, Ronald A., Capital Structure, Cost of Capital, and Voluntary Disclosures (November 3, 2010). Accounting Review 2011, Vol. 86, No. 3. Available at SSRN: http://ssrn.com/abstract=1675002

Contact Information

Jeremy Bertomeu
CUNY Baruch College ( email )
17 Lexington Avenue
New York, NY 10021
United States
Anne Beyer (Contact Author)
Stanford University - Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States

Ronald A. Dye
Northwestern University - Department of Accounting Information & Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2663 (Phone)
847-467-1202 (Fax)
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