IDEAS home Printed from https://ideas.repec.org/a/taf/euract/v11y2002i4p741-773.html
   My bibliography  Save this article

The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms

Author

Listed:
  • Luzi Hail

Abstract

The relationship between disclosure quality and cost of equity capital is an important topic in today's economy. In general, economic theory and anecdotal evidence suggest a negative association. Empirical work on this link, however, is confronted with major methodological drawbacks - neither disclosure level nor cost of capital can be observed directly - and has documented somewhat confounding results so far. Adopting a finite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm's voluntary disclosure policy on its implied cost of capital. Switzerland seems especially suited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a cross-sectional sample of seventy-three non-financial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8 to 2.4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias - a major concern in disclosure studies - the marginal effect remains of the same direction and even increases in magnitude, although at lower levels of statistical significance. One reason for the strong relationship might be found in differing institutional factors between the US and Swiss capital markets.

Suggested Citation

  • Luzi Hail, 2002. "The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms," European Accounting Review, Taylor & Francis Journals, vol. 11(4), pages 741-773.
  • Handle: RePEc:taf:euract:v:11:y:2002:i:4:p:741-773
    DOI: 10.1080/0963818022000001109
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/0963818022000001109
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Handa, Puneet & Linn, Scott C., 1993. "Arbitrage Pricing with Estimation Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 81-100, March.
    2. Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, vol. 3(3), pages 215-231, June.
    3. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Wagenhofer, Alfred, 1990. "Voluntary disclosure with a strategic opponent," Journal of Accounting and Economics, Elsevier, vol. 12(4), pages 341-363, March.
    6. O'brien, Patricia C., 1988. "Analysts' forecasts as earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 10(1), pages 53-83, January.
    7. Coles, Jeffrey L. & Loewenstein, Uri & Suay, Jose, 1995. "On Equilibrium Pricing under Parameter Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(03), pages 347-364, September.
    8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    9. Darrough, Masako N. & Stoughton, Neal M., 1990. "Financial disclosure policy in an entry game," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 219-243, January.
    10. Bernard Raffournier, 1995. "The determinants of voluntary financial disclosure by Swiss listed companies," European Accounting Review, Taylor & Francis Journals, vol. 4(2), pages 261-280.
    11. Dechow, Patricia M. & Hutton, Amy P. & Sloan, Richard G., 1999. "An empirical assessment of the residual income valuation model1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 1-34, January.
    12. repec:bla:joares:v:31:y:1993:i:2:p:246-271 is not listed on IDEAS
    13. Fried, Dov & Givoly, Dan, 1982. "Financial analysts' forecasts of earnings : A better surrogate for market expectations," Journal of Accounting and Economics, Elsevier, vol. 4(2), pages 85-107, October.
    14. Verrecchia, Robert E., 1999. "Disclosure and the cost of capital: A discussion," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 271-283, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:euract:v:11:y:2002:i:4:p:741-773. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/REAR20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.