Voluntary disclosure, earnings quality, and cost of capital

Published

Journal Article

We investigate the relations among voluntary disclosure, earnings quality, and cost of capital. We find that firms with good earnings quality have more expansive voluntary disclosures (as proxied by a self-constructed index of coded items found in 677 firms' annual reports and 10-K filings in fiscal 2001) than firms with poor earnings quality. In unconditional tests, we find that more voluntary disclosure is associated with a lower cost of capital. However, consistent with the complementary association between disclosure and earnings quality, we find that the disclosure effect on cost of capital is substantially reduced or disappears completely (depending on the cost of capital proxy) once we condition on earnings quality. Extensions probing alternative proxies show that our findings are robust to measures of earnings quality and cost of capital, but not to other measures of voluntary disclosure. In particular, we find opposite relations for voluntary disclosure measures based on management forecasts and conference calls, and we find no relations for a press release based measure. © University of Chicago on behalf of the Institute of Professional Accounting, 2008.

Full Text

Duke Authors

Cited Authors

  • Francis, J; Nanda, D; Olsson, P

Published Date

  • March 1, 2008

Published In

Volume / Issue

  • 46 / 1

Start / End Page

  • 53 - 99

Electronic International Standard Serial Number (EISSN)

  • 1475-679X

International Standard Serial Number (ISSN)

  • 0021-8456

Digital Object Identifier (DOI)

  • 10.1111/j.1475-679X.2008.00267.x

Citation Source

  • Scopus