Edwige Cheynel

A Theory of Voluntary Disclosure and Cost of Capital


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This paper explores the links between firms' voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital, and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and non-disclosing firms is positive in aggregate. I further examine whether reductions in cost of capital indicate improved risk-sharing or investment efficiency. I also find that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. As average cost of capital proxies for risk-sharing but not investment efficiency, the relation between cost of capital and ex-ante efficiency may be ambiguous and often irrelevant.

Source: Review of Accounting Studies
Exact Citation:
Cheynel, Edwige. "A Theory of Voluntary Disclosure and Cost of Capital." Review of Accounting Studies 18, no. 4 (2013): 53-99.
Volume: 18
Number: 4
Pages: 53-99
Date: 2013