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Capital Structure, Cost of Capital, and Voluntary Disclosures

48 Pages Posted: 11 Sep 2010 Last revised: 21 Apr 2012

Jeremy Bertomeu

City University of New York (CUNY) - Stan Ross Department of Accountancy

Anne Beyer

Stanford University - Graduate School of Business

Ronald A. Dye

Northwestern University - Department of Accounting Information & Management

Date Written: November 3, 2010

Abstract

This paper develops a model of financing that jointly determines a firm's capital structure, its voluntary disclosure policy, and its cost of capital. Investors who receive securities in return for supplying capital sometimes incur losses when they trade their securities with an informed trader. The firm's disclosure policy and the structure of its securities determine the information advantage of the informed trader, and hence the size of investors' trading losses and the firm's cost of capital.

We establish a hierarchy of optimal securities and disclosure policies that varies with the volatility of the firm's cash flows. Debt securities are often optimal, with the form of debt -- risk-free, investment grade, or "junk" -- varying with the firm's cash flow volatility. Though the model predicts a negative association between firms' cost of capital and the extent of information firms disclose, more expansive voluntary disclosure does not cause firms' cost of capital to decline. Mandatory disclosures alter firms' voluntary disclosures, their capital structure choices, and their cost of capital.

Keywords: Capital Structure, Cost of Capital, Voluntary Disclosure

Suggested Citation

Bertomeu, Jeremy and Beyer, Anne and Dye, Ronald A., Capital Structure, Cost of Capital, and Voluntary Disclosures (November 3, 2010). Accounting Review 2011, Vol. 86, No. 3. Available at SSRN: https://ssrn.com/abstract=1675002

Jeremy Bertomeu

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Anne Beyer (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Ronald A. Dye

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2663 (Phone)
847-467-1202 (Fax)

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