Study Of The Voluntary Disclosure's Influence On The Cost Of Equity Capital

The relationship between disclosure level and cost of equity capital is an important topic in today's economy. In general, economic theories and anecdotal evidences suggest a negative relationship. Theoretical research supporting a negative association between disclosure level and cost of equity capital has followed two related thrusts. However, weather the increasing of disclosure level helps to reduce the cost of equity capital and its force is unknown in real securities business. Does different type of disclosure have different effect on the cost of equity capital? The research on these questions is useful for reducing the cost of equity capital and increasing the value of stockholder.Empirical work, however, is confronted with major methodological drawbacks—neither disclosure level nor cost of equity capital can be observed directly—and the relationship is not well established and has been difficult to quantify. In this paper, we examine the relationship between disclosure level and the cost of equity capital(r) by regressing firm-specific estimates of r on market beta, leverage, firm size and a self-constructed measure of voluntary disclosure. Our self-constructed measure consists of six categories with a sample of 102 Chinese listed firms that disclose 2004 annual reports. The results document consistencies with theories, but only three models pass the significant test. After controlling market beta, leverage, firm size, strategy background information (STR), forecast information (FOR) and corporate governance (COR) are negatively related to r, and each regression equation is statistically significant. However, we find no evidence of an association between total measure of disclosure level and cost of equity capital, which does show that certain specific category of information has effect on the cost of equity capital but others don't.