The Economic Consequences of Increased Disclosure
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
Robert E. Verrecchia
University of Pennsylvania - Accounting Department
Journal of Accounting Research 38 (Supplement 2000), pp. 91–124
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US-GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporting regime.
Keywords: disclosure, international accounting, cost of capital, information asymmetry, liquidity
JEL Classification: D82, M41, G30
Date posted: December 13, 2000 ; Last revised: February 23, 2013
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