Segment Disclosure and Cost of Capital

Abstract

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