Voluntary Information Of Listed Companies To Disclose The Cost Of Equity Capital

The relationship between disclosure quality and cost of equity capital is a more attractive and important topic for both theoreticians and positivists. Theoretical research supports the impact of greater disclosure to reduce cost of capital by emphasizing its effect on stock market liquidity and estimation risk. Empirical work on this relationship, however, is confronted with major methodological drawbacks and has documented somewhat confounding results so far. Neither disclosure level nor cost of capital can be observed directly and both variables rely heavily on individual perception rather than actual use. In addition, as most of the prior studies focus on data from publicly held companies in the US, whose disclosure environment is already rich, it might prove difficult to document the conjectured relation empirically.China seems to be particularly suited to identify the impact of voluntary disclosure on a firm's implied cost of capital because listed companies in our stock market have considerable reporting discretion and the mandated disclosure level is low. So, I randomly selected 120 listed companies in Shanghai Stock Exchange and Shenzhen Stock Exchange according to its industrial ratio and then conducted empirical research.. Refer to some scholars' methods such as Meek's and Botosan's, I adpoted content analytical method to contrive a voluntary disclosure checklist which adapted to the disclosure practice of our market. Then I computed the sample firms' disclosure index according to the amount of voluntary disclosure provided in annual reports of 2004 impersonly. To compute prospective cost of capital (the dependent variable), I adopted the finite horizons version of the residual income model, which is considered to suit to our market's character.Results show a negative and highly significant association between the two variables. The results hold even after taking into account various other firm characteristics, e.g.firm size, market beta and financial leverage. However, it should be noticed that the disclosure policy's effect on the cost of equity seems to disappeare when applying 2SLS to clear up self-selection bias.