Disagreement and the Cost of Capital
Coauthor(s): Paul Fischer.
We assess how forms of disagreement among investors affect a firm's cost of
capital. Firms experience a lower cost of capital if investors perceive that other
investors are ignoring relevant disclosures (perceived errors of omission), but
a higher cost of capital if investors perceive that others are responding to irrelevant
disclosures (perceived errors of commission). The impact of these
two sources of disagreement on the cost of capital is determined by the distribution
of opinion and the nature of disclosure. For example, even though
aggregated disclosures reveal less to investors, aggregated disclosures may decrease
the cost of capital by eliminating disagreement associated with perceived
errors of commission. These and additional results arise because the
cost of capital is driven not only by investors' uncertainty about the firm's future
earnings performance, but also by investors' uncertainty about the evolution
of beliefs, which partly determines the path of prices.
Source: Journal of Accounting Research
Bloomfield, Robert, and Paul Fischer. "Disagreement and the Cost of Capital." Journal of Accounting Research 49, no. 1 (March 2011): 41-68.