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

See all articles by Vasiliki E. Athanasakou

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business

Florian Eugster

Stockholm School of Economics

Thomas Schleicher

University of Manchester - Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: December 15, 2019

Abstract

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

Athanasakou, Vasiliki E. and Eugster, Florian and Schleicher, Thomas and Walker, Martin, Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-Shaped Relation (December 15, 2019). Forthcoming, European Accounting Review. Available at SSRN: https://ssrn.com/abstract=3429811 or http://dx.doi.org/10.2139/ssrn.3429811

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

Florian Eugster

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Thomas Schleicher

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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