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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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    References

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    1. Robert E. Verrecchia & Christian Leuz, 1999. "The Economic Consequences of Increased Disclosure," Working Paper Series: Finance and Accounting 41, Department of Finance, Goethe University Frankfurt am Main.
    2. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    3. Beattie, Vivien & Jones, Michael John, 2001. "A six-country comparison of the use of graphs in annual reports," The International Journal of Accounting, Elsevier, vol. 36(2), pages 195-222, 05.
    4. 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.
    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, 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," Open Access publications from Tilburg University urn:nbn:nl:ui:12-173779, Tilburg University.
    7. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08.
    8. 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 2005-67, Tilburg University, Center for Economic Research.
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