Information Disclosure, Firm Growth, and the Cost of Capital

45 Pages Posted: 27 Mar 2016

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Alexander Nezlobin

London School of Economics & Political Science (LSE) - London School of Economics

Date Written: March 10, 2016

Abstract

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

Dutta, Sunil and Nezlobin, Alexander, Information Disclosure, Firm Growth, and the Cost of Capital (March 10, 2016). Available at SSRN: https://ssrn.com/abstract=2754771 or http://dx.doi.org/10.2139/ssrn.2754771

Sunil Dutta

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
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Berkeley, CA 94720
United States
510-643-1229 (Phone)
510-643-1412 (Fax)

Alexander Nezlobin (Contact Author)

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

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