This paper examines the association between the cost of equity capital and levels of annual report and timely disclosure, and investor relations activities. We estimate the cost of equity capital using the classic dividend discount model. We find that the cost of equity capital decreases in the annual report disclosure level but increases in the level of timely disclosures. The latter result is contrary to theory but is consistent with managers’ claims that greater timely disclosures may increase the cost of equity capital, possibly through increased stock price volatility. We find no association between the cost of equity capital and the level of investor relations activities. We conclude that aggregating across different disclosure types results in a loss of information. Failing to include all disclosure types in regression analyses may lead to a correlated omitted variable bias and erroneous conclusions.

Managers, investors, and researchers have a compelling interest in identifying a reliable empirical proxy for firm-specific cost of equity capital (r). In theory, deducing r is possible if the market's future cash flow forecast and current stock price are observable. Practically, deducing r is dependent on the ability to estimate the market's forecasted terminal value. We evaluate five methods of deducing firm-specific r (labeled rDIVPREM, rGLSPREM, rGORPREM, rOJNPREM, and rPEGPREM) that deal with this conundrum differently. The extent to which the estimates are associated with firm risk in a stable and meaningful manner is the basis for our assessment. We find that the rDIVPREM and rPEGPREM estimates are consistently and predictably related to risk, while the alternatives are not. Based on these results, we conclude that rDIVPREM and rPEGPREM dominate the alternatives.

Using retroactive disclosures required by Statement of Financial Accounting Standards (SFAS) No. 131, we examine managers' incentives for withholding segment information under SFAS No. 14 and the impact of SFAS No. 131 on analysts' information environment for a sample of firms that previously reported as single-segment firms and initiated segment disclosure with SFAS No. 131. We examine this set of firms because they likely had the strongest incentives to withhold segment information and analysts potentially had the most to gain when these firms were forced to begin providing segment disclosures under SFAS No. 131. We find that these firms used the latitude in SFAS No. 14 to hide profitable segments operating in less competitive industries than their primary operations. However, we find no evidence to suggest that these firms used the latitude in SFAS No. 14 to mask poor performance. In contrast, our results suggest that by withholding segment information, these firms allowed themselves to appear as if they were underperforming their competition when this was not the case. Thus, their decision to withhold segment disclosures under SFAS No. 14 appears to be motivated by a desire to protect profits in less competitive industries. In terms of the impact of SFAS No. 131 on analysts' information environment, our evidence suggests that SFAS No. 131 increased analysts' reliance on public data, but we provide weak evidence to suggest that this shift may have come at the cost of a marginal increase in overall uncertainty and squared error in the mean forecast.

Whether firms receive cost of capital benefits from greater disclosure is an important and controversial question. This paper reviews the relevant academic research that can provide insights into this question. In conducting this review, my primary objectives are to highlight the implications of existing research for accounting practitioners, standard setters, and academicians, and to address not only the question what do we know, but also the question what do we not know, yet? The overriding conclusion of existing theoretical and empirical research is that greater disclosure reduces cost of capital. Even so, several avenues for future research exist.

No abstract