Accounting disclosure in capital market

Accounting disclosure is a prominent feature of public firms characterized by dispersed ownership. Dispersed ownership of modern corporations has many consequences beyond the separation of ownership and control. Consisting of two papers, this dissertation explores two of such consequences: investors' short horizons and the feedback effect of disclosure on firms' investment decisions.;Dispersed ownership decouples the life span of the owners from that of their firms, resulting in the short horizons of investors. The first paper examines the price efficiency consequences of accounting disclosure in the context of stock markets with short-horizon investors. In such markets, public information plays an additional commonality role, biasing stock prices away from the consensus fundamental value toward public information. Despite this bias, I demonstrate that provisions of public information always drive stock prices closer to the fundamental value. Hence, as a main source of public information, accounting disclosure enhances price efficiency, and transparency should not be compromised on grounds of the so-called Keynesian-beauty-contest effect.;Dispersed ownership also makes the direct contracting between investors and a firm more expensive and thus allows stock prices to play an additional role of disciplining the firm's decisions. The second paper explores such feedback effect of capital market on the firm's real decisions and its implications for the effect of disclosure quality on the cost of capital and investors' welfare. By studying a production economy in which disclosure influences a firm's investment decisions, I disprove the conventional wisdom that accounting disclosure improves investors' welfare by reducing the cost of capital. Cost of capital is not a sufficient, statistic for the impacts of disclosure quality on the welfare of either current or new investors and there are plausible conditions under which disclosure quality could increase cost of capital. These results may help interpret the mixed empirical findings on the relation between disclosure quality and cost of capital, inform the empirical efforts to measure the economic consequences of accounting disclosure, and add to the ongoing debate on the reform of financial reporting and disclosure regulation.