EVIDENCE THAT GREATER DISCLOSURE LOWERS THE COST OF EQUITY CAPITAL

The effect of corporate disclosure on the cost of equity capital is a matter of considerable interest and importance to both corporations and the investment community. However, the relationship between disclosure level and cost of capital is not well established and has proved difficult for researchers to quantify. As described in this article, the author's 1997 study (published in The Accounting Review) was the first to measure and detect a direct relationship between disclosure and cost of capital. After examining the annual reports of 122 manufacturing companies, the author concluded that companies providing more extensive disclosure had a lower (forward‐looking) cost of equity capital (measured using Value Line forecasts with an EBO valuation formula that derives from the dividend discount model). For companies with extensive analyst coverage, differences in disclosure do not appear to affect cost of capital. But for companies with small analyst followings, differences in disclosure do appear to matter. Among this group of companies, the firms judged to have the highest level of disclosure had a cost of equity capital that was nine‐percentage points lower than otherwise similar firms with a minimal level of disclosure. Closer analysis of some of the specific disclosure practices also suggests that, for small firms with limited analyst coverage, there are benefits to providing more forward‐looking information, such as forecasts of sales, profits, and capital expenditures, and enhanced disclosure of key non‐financial statistics, such as order backlogs, market share, and growth in units sold. In closing, the article also discusses an interesting new study (by Lang and Lundholm) that suggests there is an important distinction between effective corporate disclosure and “hyping the stock.” The findings of this study show that while higher levels of disclosures are associated with higher stock prices, sudden increases in the frequency of disclosure are viewed with skepticism.     

Voluntary Disclosure with Informed Trading in the IPO Market

We examine voluntary disclosure and capital investment by an informed manager in an initial public offering (IPO) in the presence of informed and uninformed investors. We find that in equilibrium, disclosure is more forthcoming—and investment efficiency is lower—when a greater fraction of the investment community is already informed. Moreover, managers disclose more information when the likelihood of an information event is higher, more equity is issued, or the cost of information acquisition is lower. Investment efficiency and the expected level of underpricing are non‐monotonic in the likelihood that the manager is privately informed.     

Voluntary disclosure,mandatory disclosure and the cost of capital

We examine the association between a firm's cost of capital and its voluntary and mandatory disclosures. We include two types of mandatory disclosure: those that are a function of periodic reports that are realizations of ex‐ante reporting systems and those that arise due to specific corporate events. To capture a firm's voluntary and event‐driven mandatory disclosures, we use information the firm provides via 8K filings. To capture periodic mandatory disclosures, we use earnings quality measures derived from the literature. Consistent with endogenous relations predicted by theory, we find that voluntary disclosure and both types of mandatory disclosure are correlated, although only event‐driven mandatory disclosures are significant in models that explain voluntary disclosure. We also find that the cost of capital is generally influenced by each of these disclosure types. We also find that controlling for periodic mandatory disclosure does not affect the relationship between voluntary disclosure and the cost of capital, while controlling for event‐driven mandatory disclosure sometimes affects the relationship depending on the measures used. Our study suggests that a firm's disclosure environment includes the three types of disclosure examined, although the inclusion of mandatory disclosures does not affect the measured association between voluntary disclosure and the cost of capital.     

SOME EVIDENCE THAT BANKS USE INTERNAL CAPITAL MARKETS TO LOWER CAPITAL COSTS

To the extent raising external capital is especially costly for banks (as the preceding article suggests), bank managers have incentives to manage their internal cash flow in ways that minimize their need to raise external equity. One way to accomplish this is to establish bank holding companies that set up internal capital markets for the purpose of allocating scarce capital across their various subsidiaries. By “internal capital market” the authors mean a capital budgeting process in which all the lending and investment opportunities of the different subsidiaries are ranked according to their risk-adjusted returns; and all internal capital available for investment is then allocated to the highestranked opportunities until either the capital is exhausted or returns fall below the cost of capital, whichever comes first. As evidence of the operation of internal capital markets in bank holding companies, the authors report the following set of findings from their own recent studies:

• ? For large publicly traded bank holding companies, growth rates in lending are closely tied to the banks' internal cash flow and regulatory capital position.
• ? For the subsidiaries of bank holding companies, what matters most is the capital position and earnings of the holding companies and not of the subsidiaries themselves.
• ? The lending activity of banks affiliated with multiple bank holding companies appears to be less dependent on their own earnings and capital than the lending of unaffiliated banks.

The authors also report that, after being acquired, previously unaffiliated banks increase their lending in local markets. This finding suggests that, contrary to the concerns of critics of bank consolidation, geographic consolidation may make banks more responsive to local lending opportunities.     

Tobin's q-Ratio and Market Reaction to Capital Investment Announcements

There is a significant positive relation between Tobin's q-ratio and the magnitude of stock market reaction to capital investment announcements. The findings have the following implications for capital investment theory: (i) The results provide evidence substantiating the link between the q-ratio and real investment for industrial firms. For public utilities however, no such link exists, (ii) The study finds that average q and marginal q are correlated but the relation is somewhat more complicated than simple equality as assumed by numerous empirical studies. (iii) The findings suggest that investors can use average Tobin's q-ratio to identify companies with profitable real capital investment opportunities.     

注册制改革会产生溢出效应吗?——基于企业投资行为的视角北大核心

提高资本市场资源配置效率是注册制推行的重要目标之一,本文以此为出发点,构建了多期倍分法(DID)模型,探究了科创板(试点注册制)公司信息披露对同行业公司的溢出效应。研究发现,科创板公司信息披露会促使同行业公司提高研发投入,且该效应随着信息披露内容的丰富、精确度的增加而有所提高。机制分析表明,该溢出效应源自信息不确定性的降低和竞争压力的产生。同时,创板信息披露提高了同行业公司管理层对创新的认知程度以及增加了媒体关注度,进而促进公司研发投入。进一步研究发现,同行业公司研发投入受到正向溢出效应影响的同时,固定资产投入有所降低,投资结构的改变最终导致投资效率提升,显著抑制了过度投资。本文为强制性信息披露的溢出效应研究提供了因果证据,也为注册制改革政策效果的全面评估提供了支持。     

The Impact of Ambiguity on Managerial Investment and Cash Holdings

Standard finance theory suggests that managers invest in projects that, in expectation, produce returns that justify the use of capital. An underlying assumption is that managers have the information necessary to understand the distributional properties of the pay‐offs underlying the decision. This paper examines firm investment behavior when managers are likely to find it more challenging to develop expectations of pay‐offs, namely during periods of increased macroeconomic ambiguity. In particular, we examine how macroeconomic ambiguity – proxied by the variance premium (Drechsler, 2010 ) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., 2009 ) – impacts managerial capital investment and cash holdings. Consistent with ambiguity theory, we find that macroeconomic ambiguity is negatively associated with capital investment and positively associated with cash holdings. These results are robust to alternative explanations related to risk, investor sentiment and economic conditions. Moreover, consistent with recent theoretical real options literature, we find that ambiguity reduces the value of investment opportunities, while risk increases the value of such opportunities. Overall, these findings provide initial empirical evidence on the economic distinction between ambiguity and risk with respect to managerial investment and cash holdings.     

Human Capital Spending,Inequality, and Growth in Middle-Income Asia

Asia’s rapid population aging fortifies the case for strengthening human capital investments. Further, the experience of the newly industrialized economies suggests that human capital investments will be a vital ingredient of the transition from middle income to high income. Those investments can also affect equity and public finances. In this article, we use data from the National Transfer Accounts to empirically analyze the effect of human capital investment in Asian countries on economic growth, inequality, and fiscal balance. Our empirical evidence suggests that human capital investments have a positive effect on labor productivity and, hence, output. The positive effect is stronger for poorer households and, hence, beneficial for equity. We also find that such investments can generate sufficient tax revenues to improve the fiscal balance. Overall, our evidence points to a positive effect of human capital on growth, equity, and fiscal balance in Asia.     

Voluntary Disclosures,Corporate Control,and Investment

We examine the valuation and capital allocation roles of voluntary disclosure when managers have private information regarding the firm’s investment opportunities, but an efficient market for corporate control influences their investment decisions. For managers with long‐term stakes in the firm, the equilibrium disclosure region is two‐tailed: only extreme good news and extreme bad news is disclosed in equilibrium. Moreover, the market’s stock price and investment responses to bad news disclosures are stronger than the responses to good news disclosures, which is consistent with the empirical evidence. We also find that myopic managers are more likely to withhold bad news in good economic times when markets can independently assess expected investment returns.     

The Costs, Wealth Effects, and Determinants of International Capital Raising: Evidence from Public Yankee Bonds

This paper examines the costs, wealth effects, and determinants of international capital raising for a sample of 260 public debt issues made by non-U.S. firms in the Yankee bond market. We find that investors demand economically significant premiums on bonds issued by firms that are located in countries that do not protect investors' rights and do not have a prior history of ongoing disclosure. The results provide support for the literature that suggests better legal protections and more detailed information disclosure increases the price investors will pay for financial assets. Journal of Economic Literature Classification Numbers: F3, G1.     

Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures

There is gathering evidence of insider trading around corporate announcements of dividends, capital expenditures, equity issues and repurchases, and other capital structure changes. Although signaling models have been used to explain the price reaction of these announcements, a usual assumption made in these models is that insiders cannot trade to gain from such announcements. An innovative feature of this paper is to model trading by corporate insiders (subject to disclosure regulation) as one of the signals. Detailed testable predictions are described for the interaction of corporate announcements and concurrent insider trading. In particular, such interaction is shown to depend crucially on whether the firm is a growth firm, a mature firm, or a declining firm. Empirical proxies for firm technology are developed based on measures of growth and Tobin's q ratio. In the underlying “efficient” signaling equilibrium, investment announcements and net insider trading convey private information of insiders to the market at least cost. The paper also addresses issues of deriving intertemporal announcement effects from the equilibrium (cross-sectional) pricing functional. Other announcement effects relate the intensity of the market response to insider trading, variance of firm cash flows, risk aversion of the insiders, and characteristics of firm technology (growth, mature, or declining).     

Segment Disclosure and Cost of Capital

We investigate whether segment disclosure influences cost of capital. Improved segment reporting is expected to decrease cost of capital by reducing estimation risk. However, in a competitive environment segment disclosure may also generate uncertainties about future prospects and lead to a larger cost of capital. Asset‐pricing tests confirm that segment disclosure is a priced risk factor. Also, segment disclosure reduces ex‐ante estimates of cost of equity capital and other measures connected to risk. These results suggest a negative relation between segment disclosure and cost of capital. Our results also show that competition reduces, but does not eliminate, the previous relationship.     

Factores que explican la extensión de revelación de activos intangibles de los bancos que cotizan en la Bolsa de Valores de Panamá

This paper analyzes the level of voluntary disclosure of intangible assets, and identifies the factors that explain the disclosure of such information by the banks listed on the Panama Stock Exchange during the period 2005-2009. The information is recorded on an index that contains 158 indicators divided into five categories: human capital, technological structural, organizational structure, relational business and social relational. Three hypotheses are posed: H₁ there is a positive relationship between the size and extent of disclosure of intangible assets; H₂ a positive relationship between the extent of incorporation and disclosure of intangible assets; H₃ there is a positive relationship between leverage and the extent of disclosure of intangible assets. The results indicate that for Panama banks it is more important to disclose information on intangibles in the following order: business relational capital, social relational, organizational structure, human and technological structural. H₁ was accepted as a size category except for the structural capital; H₂ was accepted for the years in all categories, while H₃ was rejected.     

Transparency,Liquidity, and Valuation: International Evidence on When Transparency Matters Most

We examine the relation between firm‐level transparency, stock market liquidity, and valuation across countries, focusing on whether the relation varies with a firm's characteristics and economic environment. We document lower transaction costs and greater liquidity (as measured by lower bid‐ask spreads and fewer zero‐return days) for firms with greater transparency (as measured by less evidence of earnings management, better accounting standards, higher quality auditors, more analyst following, and more accurate analyst forecasts). The relation between transparency and liquidity is more pronounced in periods of high volatility, when investor protection, disclosure requirements, and media penetration are poor, and when ownership is more concentrated, suggesting that firm‐level transparency matters more when overall investor uncertainty is greater. Increased liquidity is associated with lower implied cost of capital and with higher valuation as measured by Tobin's Q. Finally, a mediation analysis suggests that liquidity is a significant channel through which transparency affects firm valuation and equity cost of capital.     

A theory of voluntary disclosure and cost of capital

This paper explores the links between firms’ voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and nondisclosing firms is positive in aggregate. I further examine whether reductions in cost of capital indicate improved risk-sharing or investment efficiency. I also find that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. As average cost of capital proxies for risk-sharing but not investment efficiency, the relation between cost of capital and ex ante efficiency may be ambiguous and often irrelevant.     

Analysts’ Perceptions of Intellectual Capital Information

This study is based on a survey of 324 financial analysts in Japan. The survey concerns analysts’ perceptions of intellectual capital (IC) information and its links to the evaluation of companies. The value relevance of and the access to IC‐related information reveals a large gap on many items. The analysis further shows that the lack of access to information hampers analysts’ use of IC in their evaluation of companies, particularly in their use of human capital measures. Attitudes towards more disclosure and standardisation are mainly driven by perceptions of what generates value in companies.     

Incentives,wages, and promotions: theory and evidence

I study an incentive problem that has been largely ignored in the agency literature: incentives for repeated (human capital) investment. The optimal contract is very simple but still provides rich implications for incentive and wage structures in large organizations. The empirical evidence is presented using personnel records of health insurance claim processors in a large U.S. insurance company. These processors are white‐collar, nonmanagerial, female, service industry workers—a rapidly growing but rarely studied labor group. The empirical findings are consistent with the main features of the optimal contract.     

The effects of disclosing critical audit matters and auditor tenure on nonprofessional investors’ judgments

In an effort to provide more meaningful information to financial statement users, the Public Company Accounting Oversight Board (PCAOB) recently adopted sweeping changes to the audit report, requiring the audit firm to disclose whether or not it identified a critical audit matter (CAM) and its tenure with the client. To our knowledge, ours is the first study to explore how nonprofessional investors’ judgments are influenced by (1) the relative effects of a CAM disclosure versus a disclosure that the auditor did not identify a CAM, and (2) the disclosure of the audit firm’s tenure. We find that, relative to disclosing that no CAMs were identified, disclosing a CAM reduces investment intentions. We do not find a significant effect of tenure disclosure on investment intentions, despite evidence that participants attended to and understood the tenure manipulation. Concerning investors’ cognitive processes, we find that perceptions of both risk of material misstatement and management disclosure credibility mediate the effect of CAM disclosure on investment intentions, while perceived audit quality suppresses this effect. Our contributions include furthering the understanding of cognitive mechanisms through which CAM disclosure influences investment intentions, identifying a relatively unique setting in which perceptions of management disclosure credibility and audit quality move in opposite directions, and providing evidence that auditor tenure disclosure does not appear to affect investment intentions. Our findings should be of interest to regulators, auditors, issuers, and investors.     

International capital mobility: net versus gross stocks and flows

Feldstein and Horioka (1980) observed that net capital flows have been small in relation to domestic saving and investment flows for OECD countries in the post-war period, which they interpreted as evidence of low capital mobility. This paper argues that the correlation between gross domestic and international financial flows can be a better indicator of capital mobilitythan net capital flows. Contrary to the conventional wisdom among international economists, gross flows have been small in relation to gross domestic asset creation for OECD countries, although by this measure the degree of capital mobility increased in the 1980s.