Disclosure, Transaction Costs and Investor Clienteles
Posted: 21 Apr 1997
Date Written: December 1996
Theoretical and empirical research suggests that firms can reduce their cost of capital by providing more informative disclosures about the value of their securities. We provide convergent evidence on this issue by demonstrating that improved disclosure reduces cost of capital in a controlled laboratory environment in which we can more accurately measure disclosure quality, the cost of capital and transaction costs. We also find that, as suggested by Amihud and Mendelson (1986, 1989), disclosure has greater benefits when the firm's investor clientele has a short trading horizon, primarily because short-horizon investors place a greater value on the improved liquidity and lower transaction costs associated with higher quality disclosures.
JEL Classification: M41, G12
Suggested Citation: Suggested Citation