The authors are respectively from the Cass Business School and the London School of Economics. They gratefully acknowledge the comments of David Ashton, John Jacob, Bjorn Jorgensen, Andrew Jones, Peter Kirkow, Elly Nash, Peter Pope, Eli Talmor, Richard Taffler and Marco Trombetta. This paper has also benefited from the comments of an anonymous referee, participants at the JBFA Capital Markets Conference, conference participants at XFi University of Exeter Disclosure Conference, and workshop and seminar participants at the Universities of Alicante and Southampton, and at Cass Business School and the London School of Economics.
Cost of Capital, Strategic Disclosures and Accounting Choice
Article first published online: 20 APR 2005
Journal of Business Finance & Accounting
Volume 32, Issue 3-4, pages 599–634, April 2005
How to Cite
Gietzmann, M. and Ireland, J. (2005), Cost of Capital, Strategic Disclosures and Accounting Choice. Journal of Business Finance & Accounting, 32: 599–634. doi: 10.1111/j.0306-686X.2005.00606.x
- Issue published online: 20 APR 2005
- Article first published online: 20 APR 2005
- cost of capital;
- discretionary accruals
Abstract: Theory suggests a negative relationship between disclosure and the cost of capital. However, empirical research has not, in general, confirmed this. In particular, Botosan (1997) finds no evidence of a negative relationship for firms with a high analyst following, and moreover, Botosan and Plumlee (2002a) find that firms’ cost of capital increases with timely disclosures. There are several possible explanations for this puzzle. First, the theory-driven hypothesis may be false and require re-specification. Second, there may be correlated omitted variables contaminating the results. Finally, these inconclusive results may have arisen due to problems with the measurement of disclosure. We construct an innovative measure of timely disclosure, that attempts to capture quality rather than quantity of strategic disclosures. In addition, motivated by new theoretical research by Gietzmann and Trombetta (2003), we control for a possible omitted variable, namely accounting policy choice. With this revised research design, we find the expected negative relationship. Furthermore, as predicted by Gietzmann and Trombetta, this relationship is only significant for firms adopting aggressive accounting policies.