Voluntary Disclosure and the Cost of Capital: Evidence from Management Earnings Forecasts

34 Pages Posted: 10 Jan 2006  

Joung W. Kim

affiliation not provided to SSRN

Yaqi Shi

University of Western Ontario - Richard Ivey School of Business

Date Written: December 2005

Abstract

This paper examines the effect of management earnings forecasts on the cost of capital. We find that forecasters of bad news experience a significant increase in the cost of capital in the month after their disclosure. Conversely, the cost of capital for good news forecasters declines mildly in the same period. We also indicate that bad news forecasts are more informative by comparing the absolute value changes in the cost of capital between bad and good news firms. In addition, we find no significant relation between forecast precision and the cost of capital. Finally, we examine the combined effects of the management earnings forecasts and the earnings announcement on the changes in the cost of capital. Consistent with prior studies, we show that the effect of the subsequent earnings announcement is preempted by the management forecasts for bad news firms, but not for good news firms.

Keywords: Management earnings forecasts, the cost of capital, bad news, good news, and the earnings announcement.

Suggested Citation

Kim, Joung W. and Shi, Yaqi, Voluntary Disclosure and the Cost of Capital: Evidence from Management Earnings Forecasts (December 2005). Available at SSRN: https://ssrn.com/abstract=874832 or http://dx.doi.org/10.2139/ssrn.874832

Joung W. Kim

affiliation not provided to SSRN

Yaqi Shi (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
(519) 661 4097 (Phone)

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