The Economic Consequences of Increased Disclosure

Posted: 13 Dec 2000 Last revised: 23 Feb 2013

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Multiple version iconThere are 2 versions of this paper

Date Written: 2000

Abstract

Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US-GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporting regime.

Keywords: disclosure, international accounting, cost of capital, information asymmetry, liquidity

JEL Classification: D82, M41, G30

Suggested Citation

Leuz, Christian and Verrecchia, Robert E., The Economic Consequences of Increased Disclosure (2000). Journal of Accounting Research 38 (Supplement 2000), pp. 91–124. Available at SSRN: https://ssrn.com/abstract=248411

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI)

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Center for Financial Studies (CFS) ( email )

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Germany

University of Pennsylvania - Wharton Financial Institutions Center

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CESifo Research Network

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Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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