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Disclosure Quality, Cost of Capital, and Investors' Welfare

46 Pages Posted: 7 Jul 2008 Last revised: 10 Sep 2009

Pingyang Gao

University of Chicago - Booth School of Business

Date Written: May 25, 2009

Abstract

One might expect that disclosure quality improves investor welfare by reducing cost of capital. This study shows that the argument is valid only in limited circumstances. Based on a production economy with perfect competition among investors, the analysis demonstrates three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or new investors. Finally, cost of capital could move in opposition to the welfare of either current or new investors as disclosure quality changes.

Keywords: Cost of Capital, Disclosure, Welfare, Real Effect

JEL Classification: G12, G34, G38, M41, M45

Suggested Citation

Gao, Pingyang, Disclosure Quality, Cost of Capital, and Investors' Welfare (May 25, 2009). Chicago GSB Research Paper No. 08-06 ; Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1156407 or http://dx.doi.org/10.2139/ssrn.1156407

Pingyang Gao (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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