Information asymmetry, segment disclosures, and cost of equity capital

This study extends the value-relevance research on the association between the cost of equity capital and the level of segment disclosures. Using the ex ante measures of the cost of equity capital and a hand-developed index measure of the level of segment disclosures, this study finds that the theoretical negative association between the cost of equity capital and the level of segment disclosures is increasing in the existing probability of informed trade. This study also finds mixed evidence in support of the contention that the negative association between the cost of equity capital and the level of segment disclosures is increasing (decreasing) in the absence (presence) of managerial blockholdings. Further, the increasing effect of probability of informed trade dominates the decreasing effect of the presence of managerial blockholdings. Overall, evidence suggests that the negative association between the cost of equity capital and the level of segment disclosures is increasing in the probability of informed trade and absence of managerial blockholdings.