A Theory of Voluntary Disclosure and Cost of Capital
Review of Accounting Studies, Forthcoming
35 Pages Posted: 19 Jul 2012 Last revised: 5 Sep 2012
Date Written: April 12, 2012
This paper explores the links between firms’ voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital, and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and non-disclosing firms is positive in aggregate. I further examine whether reductions in cost of capital indicate improved risk-sharing or investment efficiency. I also find that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. As average cost of capital proxies for risk-sharing but not investment efficiency, the relation between cost of capital and ex-ante efficiency may be ambiguous and often irrelevant.
Keywords: cost of capital, systematic risk, voluntary disclosure
JEL Classification: G12, M41
Suggested Citation: Suggested Citation