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Disclosure regulation, cost of capital, and firm values

Author

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  • Hao, Jinji

Abstract

This paper shows that mandating some firms to disclose more while leaving other firms disclosing voluntarily is less effective in improving and may even harm the overall information environment when firms' disclosures are endogenous. Although the regulated firms' increased disclosure directly reduces all firms' cost of capital, it crowds out the unregulated firms' voluntary disclosure and thus increases all firms’ cost of capital indirectly. Under certain circumstances, the negative indirect effect can outweigh the direct benefit. These results are consistent with the scant evidence on the cost-of-capital effect of mandatory disclosure. The model highlights the importance of the market-wide effects of disclosure regulation and facilitates quantitative cost-benefit analyses for specific regulatory proposals.

Suggested Citation

  • Hao, Jinji, 2024. "Disclosure regulation, cost of capital, and firm values," Journal of Accounting and Economics, Elsevier, vol. 77(1).
  • Handle: RePEc:eee:jaecon:v:77:y:2024:i:1:s0165410123000290
    DOI: 10.1016/j.jacceco.2023.101605
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    More about this item

    Keywords

    Disclosure regulation; Substitution; Externality; Cost of capital; Firm values;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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