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Voluntary disclosure and the cost of equity capital: Evidence from management earnings forecasts

Joung W. Kim and Yaqi Shi

Journal of Accounting and Public Policy, 2011, vol. 30, issue 4, 348-366

Abstract: This paper examines the directional effects of management earnings forecasts on the cost of equity capital. We find that forecasters of bad news experience a significant increase in the cost of equity capital in the month after their disclosure. Conversely, the cost of equity capital for good news forecasters does not change significantly in the same period. We also indicate that the magnitude of changes in the cost of capital for good news forecasters is significantly lower than that for bad news forecasters and non-forecasters, which suggests that investors may view good news forecasts less credible. Finally, we show that the effect of the subsequent earnings announcement on the cost of equity capital is preempted by the management forecasts for bad news firms, and that the combined effects of the management earnings forecasts and the earnings announcement are not significant for both good news and bad news forecasters. Our paper contributes to the literature by adding evidence on directional effects of voluntary disclosures and on long-term economic consequences of management earnings forecasts.

Date: 2011
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Handle: RePEc:eee:jappol:v:30:y:2011:i:4:p:348-366