Disclosure Quality, Cost of Capital, and Investors’ Welfare

Pingyang Gao ()

MPRA Paper from University Library of Munich, Germany

Abstract: It is widely believed that disclosure quality improves investors’ welfare by reducing cost of capital in a competitive market. This paper examines this conventional wisdom by studying a production economy in which disclosure influences a firm’s investment decisions. I demonstrate three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or new investors. Finally, cost of capital is not a sufficient statistic for the effects of disclosure quality on the welfare of either current or new investors. 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.

Keywords: Cost of Capital; Disclosure; Welfare; Real Effect (search for similar items in EconPapers)
JEL-codes: G2 K2 M4 (search for similar items in EconPapers)
Date: 2008-01, Revised 2008-06
New Economics Papers: this item is included in nep-acc and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9478

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