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Voluntary Disclosure, Earnings Quality, and Cost of Capital
Author(s) -
FRANCIS JENNIFER,
NANDA DHANANJAY,
OLSSON PER
Publication year - 2008
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2008.00267.x
Subject(s) - voluntary disclosure , earnings , earnings quality , cost of capital , proxy (statistics) , business , turnover , index (typography) , quality (philosophy) , capital (architecture) , accounting , implicit cost , economics , profit (economics) , microeconomics , total cost , philosophy , accrual , management , epistemology , archaeology , machine learning , world wide web , computer science , history
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.