This paper examines the association between expected cost of equity capital and three types of disclosure (annual report, quarterly and other published reports, and investor relations). Our sample consists of 3,620 firm-year observations with Value Line data, which are also included in the AIMR's Annual Reviews of Corporate Reporting Practices dated from 1985/1986 through 1995/1996. The disclosure rankings produced by the AIMR are employed to proxy for disclosure level. Four alternative estimates of expected cost of equity capital estimates are examined. However, we conclude that two of these approaches, that employed in Botosan (1997) and an approach based on a finite horizon specification of the Gordon growth model, dominate the other two.As expected, we find that cost of equity capital is decreasing in annual report disclosure level. The magnitude of the difference in cost of equity capital between the most and least forthcoming firms is approximately one-half to one percentage point, after controlling for market beta and firm size. Contrary to our expectations, we find a positive association between cost of equity capital and the level of more timely disclosures, such as the quarterly report. The magnitude of the difference in cost of equity capital between the most and least forthcoming firms is approximately one to two percentage points, after controlling for market beta and firm size. This result, while contrary to that predicted by theory, is consistent with managers' claims that greater timely disclosures increase cost of equity capital, possibly through increased stock price volatility. Finally, we find no association between cost of equity capital and the level of investor relations activities.These results confirm and extend the results of Botosan (1997) to include larger, more heavily followed firms, across a diverse group of industries, over a number of years. In addition, they suggest that aggregating across different types of disclosure results in a loss of information and potentially erroneous conclusions.

A lower cost of equity capital is believed by some to be a benefit of greater voluntary disclosure. I examine this association by regressing cost of capital on beta firm size and a self-constructed disclosure index based on the level of voluntary disclosure provided by 122 manufacturing firms in their 1990 annual reports. The results suggest that for lightly followed firms greater voluntary disclosure reduces cost of equity capital. No such association is found for heavily followed firms. I obtain firm-specific cost of equity capital estimates from an accounting based valuation formula. This approach incorporates forecast data thereby yielding an estimate of expected cost of equity capital and avoiding the noise arising from ex-post deviations from expected value. The association between the cost of equity capital estimates thus obtained and market beta is positive; its correlation with market value is negative. An examination of the internal consistency of the disclosure index and its association with firm characteristics identified in prior research to be correlated with annual report disclosure level provide support for the claim that the index is a valid and reliable measure of disclosure level.

Bachelor Thesis from the year 2015 in the subject Business economics - Investment and Finance, grade: 1.0, accadis Hochschule Bad Homburg, course: Final Thesis, language: English, abstract: The potential relation of increased levels of corporate disclosure on a firm’s cost of capital remains of great importance, both from a research-focussed and business- oriented point-of-view; however, the existence of methodological drawbacks has led to ever more complex studies, which eventually made the literature vast and confusing for outside readers. The purpose of this thesis was to organise and thereby simplify the different perspectives on a dynamic issue. It is argued that, in theory, enhanced transparency levels the marketplace by spreading information more equally among investors. Consequently, the information asymmetry component is mitigated, which translates into lower levels of estimation risk, transaction costs and default risk. After all, theoretical studies provided evidence that increased disclosure lowers the costs of capital. However, since neither of the involved components is directly observable, a myriad of approaches emerged to approximate actual figures. Although most of these proxies follow similar patterns, it is argued that none of the present approaches is free from constraints, which, in turn, affects the reliability of existing empirical studies. Research, after all, still lacks a generally accepted and holistic approach to the present day. In this context, one of the most recent findings provides a new and rather praxis-oriented perspective, by arguing that firms and investors are merely interested in a good-practice level of disclosure. Regardless of the perspective, an ultimate conclusion has yet to be revealed by the literature and it seems illusory that academics and practitioners agree on one approach in the future. Nevertheless, the contribution of this thesis was merely to structure and simplify the current state of a dynamic issue. The author therefore used easy to understand graphics and tables and linked the findings to related fields of research, where necessary.

In this paper we conjecture that the weak association between disclosure and cost of equity capital found in the literature (Botosan, 1997) can be caused by the high level corporate disclosure environment found in the US. We hypothesize that in low level corporate disclosure environments the variability in disclosure practices across firms will be larger than in the US and consequently the marginal effect of voluntary disclosure policies will be higher. Using a newly developed Brazilian Corporate Disclosure Index (BCDI) our results confirm this hypothesis. Disclosure is strongly associated with ex ante cost of equity capital for Brazilian firms. The results are more pronounced for firms with less analyst coverage and low ownership concentration as expected.

This dissertation investigates the relation between firm disclosure, analyst forecast bias, and the cost of equity capital (COEC). Since analyst forecast bias is associated with both implied COEC estimates and disclosure, it is important to control for or remove it from COEC estimates when estimating the relation between disclosure and ex ante expected returns. I begin my analysis by predicting and removing systematic ex ante bias from analyst forecasts to produce de-biased analyst forecasts that better proxy for the market's ex ante earnings expectations. I use these de-biased analyst forecasts to produce estimates of ex ante expected returns, both at the portfolio- and the firm-level. In addition, I develop a novel estimate of ex ante expected returns by applying Vuolteenaho's (2002) return decomposition framework to ex post realized returns and accounting data. Finally, using several techniques to control for analyst forecast bias and self-selection bias, I find theoretically consistent evidence of a negative association between regular disclosure and ex ante expected returns. I predict and show that inferences can change when analyst forecast bias is controlled for.

Seminar paper from the year 2020 in the subject Business economics - Accounting and Taxes, grade: 1.0, Mannheim University of Applied Sciences, language: English, abstract: A series of financial crises and corporate scandals gave rise to increasing concerns about prevailing models of corporate governance and disclosure and stimulated financial disclosure and reporting regulation. As a result, there has been considerably more interest in documenting the benefits of increased disclosure than its costs. Accordingly, numerous papers purport to provide evidence of capital market benefits through incremental disclosure. At the same time, firms refrain from voluntarily committing to increased disclosure, implying that there must be a trade-off between associated benefits and costs. Consequently, critics contend that the capital market benefits are inconclusive. Instead, increased disclosure may result in adverse capital market effects through increasing information asymmetry. Moreover, critics predict that increased disclosure imposes further costs on the firm. The purpose of this seminar thesis is to review existing literature on these expected costs of increased disclosure. Thereby, I focus on controversies regarding the heavily debated capital market effects as well as on specific forces that determine proprietary and litigation costs associated with increased disclosure. While a firm’s disclosure choices likely are a joint outcome of market forces and incentives provided by regulation, the seminar thesis is limited to voluntary disclosure choices as a starting point for possible disclosure regulation. The remainder of the seminar thesis is structured as follows. Section 2 reviews the literature on the capital market effects of voluntary disclosure through its impact on information asymmetry. Section 3 discusses the ambiguous impact of voluntary disclosure on litigation and proprietary costs. Section 4 concludes the seminar thesis.