Disclosure and the Cost of Equity Capital: An Analysis at the Market Level

Abstract:     
This study examines whether market-wide disclosure reduces the market cost of capital. Using a sample of management forecasts issued between 1994 and 2010, we find that an increase in disclosure at the aggregate level results in a lower market cost of capital. This result is robust to controlling for macroeconomic conditions, market volatility, aggregate news, and other determinants of cost of capital. Overall, our findings are consistent with disclosure increasing overall information precision, resulting in a decrease in the cost of capital at the market level.

Keywords: disclosure, implied cost of capital, cost of equity capital, earnings guidance, management forecasts

JEL Classification: M40, M41, G10, G12

working papers series