A Tale of Beauties and Beasts: Testing the Optimal Disclosure Hypothesis

29 Pages Posted: 18 Jun 2015

See all articles by Håkan Jankensgård

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: June 17, 2015

Abstract

According to the cost-of-capital hypothesis, increased voluntary disclosure should reduce information asymmetries, lower the cost of capital, and increase firm value. The optimal-disclosure hypothesis, however, predicts that costs related to voluntary disclosure lead to the existence of an interior optimum of disclosure that maximizes firm value. These hypotheses are empirically tested using a previously unexplored database that covers disclosure rankings for listed Swedish firms between 2007 and 2012 (rendering around 1000 firm-years). The evidence is consistent with the optimal-disclosure hypothesis. I find a robust quadratic relationship between Tobin’s Q and the level of disclosure in annual reports. I find no significant relationship, however, between Tobin’s Q and disclosure in quarterly reports or web-based reporting.

Keywords: voluntary disclosure, cost of capital, Tobin’s Q, optimal disclosure

JEL Classification: G30, G32

Suggested Citation

Jankensgård, Håkan, A Tale of Beauties and Beasts: Testing the Optimal Disclosure Hypothesis (June 17, 2015). Multinational Finance Journal, Vol. 18, No. 1/2, p. 139-167, 2014. Available at SSRN: https://ssrn.com/abstract=2619658

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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