Segment Disclosure and Cost of Capital
Journal of Business Finance & Accounting, Forthcoming
45 Pages Posted: 19 Jan 2012 Last revised: 23 Jan 2015
Date Written: November 24, 2014
We investigate whether segment disclosure influences cost of capital. Improved segment reporting is expected to decrease cost of capital by reducing estimation risk. However, in a competitive environment segment disclosure may also generate uncertainties about future prospects and lead to a larger cost of capital. Asset-pricing tests confirm that segment disclosure is a priced risk factor. Also, segment disclosure reduces ex-ante estimates of cost of equity capital and other measures connected to risk. These results suggest a negative relation between segment disclosure and cost of capital. Our results also show that competition reduces, but does not eliminate, the previous relationship.
Keywords: Segment disclosure, earnings quality, diversification, information asymmetries, forecast error, cost of capital
JEL Classification: M41, G12
Suggested Citation: Suggested Citation