Enhanced voluntary disclosures and its effects on the cost of capital: An empirical examination of the FASB's improving business reporting. Insights into enhanced voluntary disclosures

This study evaluates the relationship between enhanced voluntary disclosure of nonfinancial data and the cost of capital (equity and debt). My inquiry is motivated by the growing role of nonfinancial measures in financial reporting, and is especially timely in light of reports issued by both the American Institute of Certified Public Accountants (AICPA 1994) and the Financial Accounting Standards Board (FASB 2001) calling for expanded use of such disclosures.; I study the industries and related nonfinancial performance measures that were discussed by the FASB in their recent report, Improving Business Reporting: Insights into Enhancing Voluntary Disclosures (FASB 2001). I focus on these industry-specific measures because the FASB asserts that these measures are important indicators of financial performance that should be voluntarily disclosed by those firms seeking to reduce their average cost of capital by producing high quality financial reports, and current literature has found little empirical evidence documenting the purported benefits of enhanced disclosures and cost of capital. This study responds to this void by testing whether the specific disclosures recommended in the enhanced voluntary disclosure report are associated with reduced cost of capital.; The results indicate the enhanced voluntary disclosures noted by the FASB, in particular the forward looking information and information about intangible assets, have a negative relationship with a firm's cost of debt. Forward-looking information provides a 2.4% reduction in a firm's cost of debt, while information about intangible assets provides a 2.6% reduction in a firm's cost of debt. The remaining enhanced voluntary disclosure variables yield no significant results regarding the cost of debt. The analysis between the cost of equity and the enhanced voluntary disclosures provide no significant results on any of the enhanced voluntary disclosure variables indicating the enhanced voluntary disclosures may not lead to a reduction in a firm's cost of equity.