Quality of Financial Reporting Choice: Determinants and Economic Consequences
56 Pages Posted: 8 Oct 2008
Date Written: March 2003
I investigate the determinants and economic consequences associated with firms financial reporting choices. Recognizing the endogeneity associated with these choices, Ifind evidence of a positive association between investors demands for firm-specificinformation and financial reporting quality. I also find that higher proprietary costs areassociated with a lower quality of financial information. As for the economic consequences, the evidence suggests that firms with high quality financial reportingpolicies have reduced information asymmetries. However, after accounting for the endogeneity associated with the reporting quality choice, I find no significant evidence that firms choosing to provide financial information of higher quality enjoy a lower cost of equity capital. These results demonstrate the importance of explicitly modeling the endogeneity of financial reporting choices in investigating the associated economic consequences.
Keywords: Financial reporting quality, cost of equity capital, proprietary costs, risk factors, endogeneity
Suggested Citation: Suggested Citation