Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-Shaped Relation
Forthcoming, European Accounting Review
52 Pages Posted: 5 Aug 2019 Last revised: 16 Dec 2019
Date Written: December 15, 2019
We hypothesise and test for a U-shaped relation between the cost of equity capital and the level of disclosure in annual report narratives. Using a computer-generated word-count-based index of the level of disclosure in U.K. annual report narratives, we document a negative relation with the cost of equity capital at low levels of disclosure, and a positive relation at higher levels of disclosure, together implying the presence of an optimal level of disclosure. We interpret the positive relation at higher levels of disclosure as evidence of uninformative clutter increasing the cost of equity capital. Additional analyses indicate the presence of both firm-level learning and regulatory corporate reporting initiatives as factors shaping adjustments towards optimum levels of disclosure.
Keywords: Clutter, Cost of Equity Capital, Disclosure Optimum, Learning Effects, Narratives, U-Shaped Relation
JEL Classification: C33, C36, G30, M41
Suggested Citation: Suggested Citation