Information Disclosure, Firm Growth, and the Cost of Capital
45 Pages Posted: 27 Mar 2016
Date Written: March 10, 2016
We study how information disclosure affects the cost of equity capital and investor welfare in a dynamic setting. We show that a firm's cost of capital decreases (increases) in the precision of public disclosure if the firm's growth rate is below (above) a certain threshold. The threshold growth rate is higher when the firm's cash flows are more persistent, or when other firms in the economy are growing at low rates. While current shareholders always prefer maximum public disclosure, future shareholders' welfare decreases (increases) in the precision of public disclosure if the firm's growth rate is below (above) the threshold.
Keywords: Cost of capital, Information disclosure, Risk premium, Growth
JEL Classification: G12, D90, M45
Suggested Citation: Suggested Citation