Disclosure Quality, Cost of Capital, and Investor Welfare

Pingyang Gao

156 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Corporate Finance and Governance Accounting Theory and Financial Reporting

Abstract

ABSTRACT: One might expect that disclosure quality improves investor welfare by reducing cost of capital. This study shows that the argument is valid only in limited circumstances. Based on a production economy with perfect competition among investors, the analysis demonstrates three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or new investors. Finally, cost of capital could move in opposition to the welfare of either current or new investors as disclosure quality changes.

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References

1985Continuous Auctions and Insider Trading 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1980On the Impossibility of Informationally Efficient Markets 1978Asset Prices in an Exchange Economy 1991Disclosure, Liquidity, and the Cost of Capital 1980On the Impossibility of Informationally Efficient Markets 2004Information and the Cost of Capital 2007Accounting Information, Disclosure, and the Cost of Capital

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2017A theory of risk disclosure 2010Information and the Cost of Capital: An Ex Ante Perspective 2015Should we regulate financial information?2016Information Disclosure, Firm Growth, and the Cost of Capital 2014The Effect of Information on Uncertainty and the Cost of Capital 2010Effects of SFAS 133 on the Risk Relevance of Accounting Measures of Banks’ Derivative Exposures

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