Edwige Cheynel

Voluntary Disclosures and the Cross Section of Expected Returns

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Abstract:
This paper explores the links between firms' voluntary disclosures and their cost of capital. I relate the differences in costs of capital between disclosing and nondisclosing firms to disclosure frictions and equity risk premia. Specifically, I show that firms that voluntary disclose their information have a lower cost of capital than firms that do not disclose. I also examine the extent to which reductions in cost of capital map into improved risk-sharing and/or greater productive efficiency. I prove that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. Economic efficiency decreases as the disclosure friction increases because of inefficient production in an underinvestment equilibrium. As the disclosure friction continues to increase, the equilibrium switches to overinvestment and further increases in the disclosure friction improve risk-sharing. Importantly the relation between average cost of capital and economic efficiency is ambiguous. A decrease in average cost of capital in the economy only implies an increase in economic efficiency if there is overinvestment.

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