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Does graph disclosure bias reduce the cost of equity capital?

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  • Flora Muiño Vázquez

    (Universidad Carlos III de Madrid)

  • Marco Trombetta

    ()
    (Universidad Carlos III de Madrid)

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    Abstract

    Research on disclosure and capital markets focuses primarily on the amount of information provided but pays little attention to the presentation format of this information. This paper examines the impact of graph utilization and graph quality (distortion) on the cost of equity capital, controlling for the interaction between disclosure and graph distortion. Despite the advantages of graphs in communicating information, our results show that graphutilization does not have a significant impact on users’ decisions. However we observe a significant (negative) association between graph distortion and the ex-ante cost of equity. This effect though, disappears if we use realised returns as a measure of ex-post cost of equity. Moreover, we find that disclosure and graph distortion interact so that the impact of disclosure on the cost of capital depends on graph integrity. For low level of overall disclosure, graph distortion reduces the ex-ante cost of equity. However for high level of disclosure graph distortion increases the ex-ante cost of equity.

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    Bibliographic Info

    Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0039.

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    Length: 44 pages
    Date of creation: Apr 2007
    Date of revision:
    Handle: RePEc:pad:wpaper:0039

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    Keywords: equity capital; graphs;

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    1. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    2. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1553-1583, 08.
    3. James L. Davis & Eugene F. Fama & Kenneth R. French, 2000. "Characteristics, Covariances, and Average Returns: 1929 to 1997," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 389-406, 02.
    4. Nikolaev, V. & Lent, L.A.G.M. van, 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-173779, Tilburg University.
    5. Valeri Nikolaev & Laurence van Lent, 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(4), pages 677-724.
    6. Nikolaev, V. & Lent, L.A.G.M. van, 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Discussion Paper, Tilburg University, Center for Economic Research 2005-67, Tilburg University, Center for Economic Research.
    7. Desanctis, Gerardine & Jarvenpaa, Sirkka L., 1989. "Graphical presentation of accounting data for financial forecasting: An experimental investigation," Accounting, Organizations and Society, Elsevier, vol. 14(5-6), pages 509-525, October.
    8. Robert E. Verrecchia & Christian Leuz, 1999. "The Economic Consequences of Increased Disclosure," Working Paper Series: Finance and Accounting, Department of Finance, Goethe University Frankfurt am Main 41, Department of Finance, Goethe University Frankfurt am Main.
    9. Jayne Godfrey & Paul Mather & Alan Ramsay, 2003. "Earnings and Impression Management in Financial Reports: The Case of CEO Changes," Abacus, Accounting Foundation, University of Sydney, Accounting Foundation, University of Sydney, vol. 39(1), pages 95-123.
    10. Beattie, Vivien & Jones, Michael John, 2001. "A six-country comparison of the use of graphs in annual reports," The International Journal of Accounting, Elsevier, Elsevier, vol. 36(2), pages 195-222, 05.
    11. H.S. Shin, 1994. "News Management and the Value of Firms," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 58-71, Spring.
    12. M. Gietzmann & J. Ireland, 2005. "Cost of Capital, Strategic Disclosures and Accounting Choice," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 32(3-4), pages 599-634.
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