Growth Matters: Disclosure and Risk Premium

54 Pages Posted: 2 Aug 2016 Last revised: 2 Jun 2019

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Rachel M. Hayes

University of Utah - David Eccles School of Business

Marlene Plumlee

University of Utah - School of Accounting

Date Written: May 1, 2019

Abstract

A number of theoretical studies predict an unconditional negative association between firm risk premium and firm disclosure, where additional disclosure reduces estimation risk or information asymmetry. Empirical studies based on these models frequently report mixed results. Dutta and Nezlobin (2017) propose a model where the effect of disclosure on risk premium differs based on the firm’s long-term growth rate relative to a threshold rate, which reflects the relative importance of short-term cash flows and long-term cash flows. When the long-term growth rate exceeds the threshold, greater disclosure increases the firm’s risk premium, rather than decreasing it. Motivated by the findings in their model, we estimate two long-term growth rate thresholds and reexamine the relation between risk premium and disclosure conditional on those thresholds. We provide evidence that the association between risk premium and disclosure is positive (negative) for firms with long-term growth rates above (below) a threshold long-term growth rate, as predicted by Dutta and Nezlobin (2017).

Keywords: Expected Returns, Risk Premium, Growth, Voluntary Disclosure, Mandatory Disclosure

JEL Classification: M41, G21

Suggested Citation

Ellahie, Atif and Hayes, Rachel M. and Plumlee, Marlene A., Growth Matters: Disclosure and Risk Premium (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=2816984 or http://dx.doi.org/10.2139/ssrn.2816984

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Rachel M. Hayes

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Marlene A. Plumlee

University of Utah - School of Accounting ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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