The authors are indebted to Professor Anne Wyatt for her detailed comments on the previous version of this manuscript. All remaining errors and omissions remain our responsibility.
Disclosure, conservatism and the cost of equity capital: A review of the foundation literature
Article first published online: 8 NOV 2010
© 2010 The Authors. Accounting and Finance © 2010 AFAANZ
Accounting & Finance
Volume 51, Issue 1, pages 2–49, March 2011
How to Cite
Artiach, T. C. and Clarkson, P. M. (2011), Disclosure, conservatism and the cost of equity capital: A review of the foundation literature. Accounting & Finance, 51: 2–49. doi: 10.1111/j.1467-629X.2010.00387.x
- Issue published online: 1 MAR 2011
- Article first published online: 8 NOV 2010
- Received 10 March 2009; accepted 5 October 2010 by Robert Faff (Editor).
- Cost of equity capital;
In this review piece, we survey the literature on the cost of equity capital implications of corporate disclosure and conservative accounting policy choice decisions with the principle objective of providing insights into the design and methodological issues, which underlie the empirical investigations. We begin with a review of the analytical studies most typically cited in the empirical research as providing a theoretical foundation. We then turn to consider literature that offers insights into the selection of proxies for each of our points of interest, cost of equity capital, disclosure quality and accounting conservatism. As a final step, we review selected empirical studies to illustrate the relevant evidence found within the literature. Based on our review, we interpret the literature as providing the researcher with only limited direct guidance on the appropriate choice of measure for each of the constructs of interest. Further, we view the literature as raising questions about both the interpretation of empirical findings in the face of measurement concerns and the suitability of certain theoretical arguments to the research setting. Overall, perhaps the message which is most clear is that one of the most controversial and fundamental issues underlying the literature is the issue of the diversifiability or nondiversifiability of information effects.