Disclosure regulation, cost of capital, and firm values

Jinji Hao

Journal of Accounting and Economics, 2024, vol. 77, issue 1

Abstract: This paper shows that mandating some firms to disclose more while leaving other firms disclosing voluntarily is less effective in improving and may even harm the overall information environment when firms' disclosures are endogenous. Although the regulated firms' increased disclosure directly reduces all firms' cost of capital, it crowds out the unregulated firms' voluntary disclosure and thus increases all firms’ cost of capital indirectly. Under certain circumstances, the negative indirect effect can outweigh the direct benefit. These results are consistent with the scant evidence on the cost-of-capital effect of mandatory disclosure. The model highlights the importance of the market-wide effects of disclosure regulation and facilitates quantitative cost-benefit analyses for specific regulatory proposals.

Keywords: Disclosure regulation; Substitution; Externality; Cost of capital; Firm values (search for similar items in EconPapers)
JEL-codes: D53 D83 G14 G18 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:77:y:2024:i:1:s0165410123000290

DOI: 10.1016/j.jacceco.2023.101605

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