Disclosure Quality, Cost of Capital, and Investors' Welfare
46 Pages Posted: 7 Jul 2008 Last revised: 10 Sep 2009
Date Written: May 25, 2009
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: Suggested Citation