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Regulation fair disclosure and the cost of equity capital

Author

Listed:
  • Zhihong Chen

    (City University of Hong Kong)

  • Dan S. Dhaliwal

    (University of Arizona
    Korea University)

  • Hong Xie

    (University of Kentucky)

Abstract

We examine the effect of Regulation Fair Disclosure (Reg FD) on the cost of equity capital. We find some evidence that (1) the cost of capital declines in the post-Reg FD period relative to the pre-Reg FD period, on average, for a broad cross-section of US firms, (2) the decrease in the cost of capital post Reg FD is mainly for medium and large firms but is insignificant for small firms, and (3) the decrease in the cost of capital post Reg FD is systematically related to firm characteristics indicative of selective disclosure before Reg FD. In contrast, we find little evidence of a decrease in the cost of capital for American Depositary Receipts and US-listed foreign firms, which are legally exempt from Reg FD. Overall, our findings do not support a conclusion in recent studies that the cost of capital has increased post Reg FD and, if anything, suggest the opposite.

Suggested Citation

  • Zhihong Chen & Dan S. Dhaliwal & Hong Xie, 2010. "Regulation fair disclosure and the cost of equity capital," Review of Accounting Studies, Springer, vol. 15(1), pages 106-144, March.
    • Handle: RePEc:spr:reaccs:v:15:y:2010:i:1:d:10.1007_s11142-009-9115-6
    DOI: 10.1007/s11142-009-9115-6
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    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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