Cost of Capital and Liquidity of Foreign Private Issuers Exempted from Filing with the SEC: Disclosure Effect or Earnings Quality Effect?

Posted: 28 Apr 2010  

Giorgio Gotti

University of Texas at El Paso (UTEP)

Stacy A. Mastrolia

Bucknell University - School of Management

Date Written: April 27, 2010

Abstract

Prior theoretical research generally predicts a negative association between disclosure quality and cost of capital and a positive association between disclosure quality and liquidity. In this study, we examine the effect on cost of capital and liquidity of a reporting exemption for foreign private issuers (FPI). Specifically, we test for differences in a firm's cost of equity capital, total cost of capital, and liquidity (bid-ask spread) based on exemption status. Our results indicate that, as expected, exempted FPIs, providing less disclosure to the market, exhibit a higher cost of equity capital, higher total cost of capital, and wider bid-ask spread. As a previous study showed that the reporting exemption was associated with lower earnings quality, we further tested our hypotheses conditional on earnings quality. Our results indicate that the primary relations are between earnings quality and cost of capital and disclosure quality and liquidity. These results enhance our knowledge of the characteristics of exempt and reporting FPIs and extend prior empirical evidence on the relations between financial disclosure practices and earnings quality, and cost of capital and firm liquidity.

Keywords: 1934 Exchange Act Rule 12g3-2(b), financial disclosure quality, cost of capital, liquidity, exemption

JEL Classification: M41, M45, M44

Suggested Citation

Gotti, Giorgio and Mastrolia, Stacy A., Cost of Capital and Liquidity of Foreign Private Issuers Exempted from Filing with the SEC: Disclosure Effect or Earnings Quality Effect? (April 27, 2010). Available at SSRN: https://ssrn.com/abstract=1597009

Giorgio Gotti

University of Texas at El Paso (UTEP) ( email )

500 West University Avenue
El Paso, TX 79968-0542
United States

Stacy A. Mastrolia (Contact Author)

Bucknell University - School of Management ( email )

Lewisburg, PA 17837
United States

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