Structural Equation Modeling in Archival Capital Markets Research: An Empirical Application to Disclosure and Cost of Capital

Journal of Financial Reporting, Vol. 8, No. 2, Fall 2023. Available at: https://doi.org/10.2308/JFR-2019-0021

Posted: 5 Jun 2015 Last revised: 8 Nov 2023

See all articles by Lisa A. Hinson

Lisa A. Hinson

University of Florida - Warrington College of Business Administration

Steven Utke

University of Connecticut - Department of Accounting

Date Written: July 10, 2023

Abstract

Structural equation modeling (SEM), an empirical methodology underutilized in archival research, enables researchers to examine paths linking constructs. SEM consists of two components: a measurement model that generates common factors from observed variables and a path model that links the factors. We discuss SEM’s components, estimation, advantages, best practices, and limitations. We illustrate SEM with an application to disclosure research. Unlike some prior research, we find voluntary disclosure quality is negatively associated with cost of capital, both directly and indirectly through information asymmetry, even after controlling for earnings quality’s direct and indirect associations with cost of capital. We believe SEM offers fruitful avenues for future research because it allows flexibility in modeling relations guided by theory, enables tests of underlying theoretical mechanisms, provides tools to address measurement error and missing data, and estimates simultaneous equations. SEM may be useful in settings that currently use path analysis or principal component analysis.

Keywords: Structural Equation Modeling, Voluntary Disclosure, Information Asymmetry, Earnings Quality, Cost of Capital

JEL Classification: M41, C30

Suggested Citation

Hinson, Lisa A. and Utke, Steven, Structural Equation Modeling in Archival Capital Markets Research: An Empirical Application to Disclosure and Cost of Capital (July 10, 2023). Journal of Financial Reporting, Vol. 8, No. 2, Fall 2023. Available at: https://doi.org/10.2308/JFR-2019-0021, Available at SSRN: https://ssrn.com/abstract=2614085 or http://dx.doi.org/10.2139/ssrn.2614085

Lisa A. Hinson (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Steven Utke

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

HOME PAGE: http://www.steveutkedata.com/

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