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Information disclosure, firm growth, and the cost of capital

Author

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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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    References listed on IDEAS

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    1. repec:eee:joacli:v:41:y:2018:i:c:p:142-172 is not listed on IDEAS
    2. repec:eee:reveco:v:63:y:2019:i:c:p:76-93 is not listed on IDEAS

    More about this item

    Keywords

    Cost of capital; Information disclosure; Risk premium; Growth;

    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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