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Information disclosure, firm growth, and the cost of capital

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  • Dutta, Sunil
  • Nezlobin, Alexander

Abstract

We study how information disclosure affects the cost of equity capital and investor welfare in a dynamic setting. We show that a firm’s cost of capital decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) a certain threshold. The threshold growth rate is higher when the firm’s cash flows are more persistent, or when other firms in the economy are growing at low rates. While current shareholders always prefer maximum public disclosure, future shareholders’ welfare decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) the threshold.

Suggested Citation

  • Dutta, Sunil & Nezlobin, Alexander, 2017. "Information disclosure, firm growth, and the cost of capital," Journal of Financial Economics, Elsevier, vol. 123(2), pages 415-431.
  • Handle: RePEc:eee:jfinec:v:123:y:2017:i:2:p:415-431
    DOI: 10.1016/j.jfineco.2016.04.001
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    Cited by:

    1. Xue, Hao & Zheng, Ronghuo, 2021. "Word-of-mouth communication, noise-driven volatility, and public disclosure," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    2. Zhao, Tianjiao & Xiao, Xiang, 2019. "The impact of corporate social responsibility on financial constraints: Does the life cycle stage of a firm matter?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 76-93.
    3. Zhifang Zhou & Hong Zhou & Huixiang Zeng & Xiaohong Chen, 2018. "The impact of water information disclosure on the cost of capital: An empirical study of China's capital market," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(6), pages 1332-1349, November.
    4. Natalya Zelenyuk & Robert Faff & Shams Pathan, 2020. "Size‐conditioned mandatory capital adequacy disclosure and bank intermediation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4387-4417, December.
    5. Schreder, Max, 2018. "Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 142-172.
    6. Tesfaye T. Lemma & Martin Feedman & Mthokozisi Mlilo & Jin Dong Park, 2019. "Corporate carbon risk, voluntary disclosure, and cost of capital: South African evidence," Business Strategy and the Environment, Wiley Blackwell, vol. 28(1), pages 111-126, January.
    7. Florian Eugster, 2020. "Endogeneity and the Dynamics of Voluntary Disclosure Quality: Is there Really an Effect on the Cost of Equity Capital?," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2590-2614, December.
    8. Huang, Yong & Yan, Chao, 2020. "Global accounting standards, financial statement comparability, and the cost of capital," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 301-318.

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    More about this item

    Keywords

    Cost of capital; Information disclosure; Risk premium; Growth;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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