The Impact of Voluntary Corporate Disclosures on the Ex ante Cost of Capital for Swiss Firms

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 nonfinancial 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. 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 directlyand has documented somewhat confounding results so far. Adopting a tillite 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 s uited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a crosssectional sample of73 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 ...

Let’s talk strategy: the impact of voluntary strategy disclosure on the cost of equity capital

“…Additionally, her analysis is limited to only one industry and one year. In a subsequent study, Hail (2002) also provides evidence of a negative association between disclosure quality in general and the cost of equity capital, using a sample of 73 Swiss firms. Petrova et al (2012) confirmed this notion for another sample of 121 listed Swiss firms.…”

“…Disclosure theory presupposes that investors benefit from voluntary information that is provided above and beyond mandatory disclosure (Leuz and Verrecchia 2000;Hail 2002). In order to study the effect of voluntary strategy disclosure on cost of equity capital, our research is building on three related strands of literature.…”

“…We therefore opt for cross-sectional regression analysis, following the major body of literature represented, amongst others, by Botosan (1997), Leuz and Verrecchia (2000), Hail (2002), Daske (2006), Glaum et al (2011), or Dhaliwal et al (2011. ''Appendix 2'' provides a detailed overview of all variables surveyed with respect to our sample and lists the relevant data sources.…”

“…Some papers use available archival metrics on disclosure rankings, e.g., AIMR data (e.g., Lang and Lundholm 1993;Healy et al 1999;Lundholm 2000 or Botosan andPlumlee 2002). Others use self-constructed scores that are based on a normative understanding of 'comprehensive' disclosures (e.g., Hossain et al 1995;Gray et al 1995;Botosan 1997;Hail 2002;Jones 2007;Grüning 2011).…”

“…Our paper is embedded into the empirical literature on voluntary disclosure in financial accounting and its impact on investor decision-making (e.g., Botosan 1997;Hail 2002;Leuz and Verrecchia 2000;Healy and Palepu 2001;Botosan 2006;Daske 2006;Gu and Li 2007;Wysocki 2008 or Glaum et al 2011). Whereas this literature provides broad, though not unanimous evidence that an increase in credible voluntary disclosure is associated with a decreasing cost of equity capital and other, related measures, there is still a research gap regarding the impact of voluntary disclosures on strategy.…”