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Disclosure Quality, Cost of Capital, and Investors’ Welfare

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Author Info
Gao, Pingyang

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Abstract

It is widely believed that disclosure quality improves investors’ welfare by reducing cost of capital in a competitive market. This paper examines this conventional wisdom by studying a production economy in which disclosure influences a firm’s investment decisions. I demonstrate three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or new investors. Finally, cost of capital is not a sufficient statistic for the effects of disclosure quality on the welfare of either current or new investors. These results may help interpret the mixed empirical findings on the relation between disclosure quality and cost of capital, inform the empirical efforts to measure the economic consequences of accounting disclosure, and add to the ongoing debate on the reform of financial reporting and disclosure regulation.

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File URL: http://mpra.ub.uni-muenchen.de/9478/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9478.

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Date of creation: Jan 2008
Date of revision: Jun 2008
Handle: RePEc:pra:mprapa:9478

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Related research
Keywords: Cost of Capital Disclosure Welfare Real Effect

Find related papers by JEL classification:
K2 - Law and Economics - - Regulation and Business Law
G2 - Financial Economics - - Financial Institutions and Services
M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting

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References listed on IDEAS
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