Relationship between Cost of Equity Capital And Voluntary Corporate Disclosures

Transcription

1 Rlationship btwn Cost of Equity Capital And Voluntary Corporat Disclosurs Elna Ptrova Eli Lilly & Co, Sofia, Bulgaria Gorgios Gorgakopoulos (Corrsponding author) Amstrdam Businss School, Univrsity of Amstrdam, Nthrlands Ioannis Sotiropoulos Dpartmnt of Financ and Auditing, Tchnological Educational Institut of Epirus, Grc Konstantinos Z. Vasiliou Dpartmnt of Businss Planning & Information Systms, TEI of Patras, Grc Rcivd: Octobr 14, 2011 Accptd: Novmbr 4, 2011 Publishd: March 1, 2012 doi: /ijf.v4n3p83 URL: Abstract Th rlationship btwn disclosur and cost of quity capital has always bn intrsting not only for managrs, but for invstors as wll. Economic thory suggsts that by incrasing th lvl of corporat rporting firms not only incras thir stock markt liquidity, but thy also dcras th invstors stimation risk, arising from uncrtainty about futur rturns and payout distributions. Utilizing th Rsidual Incom Valuation Modl, th implid cost of capital is stimatd for a sampl of 121 Swiss listd, non-financial companis adopting a finit horizon vrsion of th rsidual incom valuation modl. Th rsults show that firms on th Swiss markt can rduc thir cost of quity capital by incrasing th lvl of thir voluntary corporat disclosurs. Th rsults prsist vn aftr controlling for various firm spcific risks, such as firm siz or financial lvrag and rgardlss of company s rporting stratgy (consrvativ or aggrssiv). Kywords: Equity capital, Corporat disclosur, Swiss companis, Rsidual incom valuation modl, Accounting policy 1. Introduction Undrstanding th rlationship btwn th lvl of voluntary corporat disclosurs and th cost of quity capital has always bn intrsting not only for managrs, but also for invstors. Prior thortical work on asst pricing (Botosan, 1997) suggsts that disclosur policy is ngativly associatd to a firm s cost of quity capital. In gnral, two litratur strams support th ngativ rlationship of incrasd disclosurs to cost of quity financing. On is basd on th improvd stock markt liquidity (Dmstz, 1968; Copland & Galai, 1983; Glostn & Milgrom, 1985; Amihud & Mndlson, 1986; Diamond & Vrrcchia, 1991); th othr rlis on th rducd non-divrsifiabl stimation risk (Botosan, 2006; Barry & Brown, 1985; Cols & Lownstin, 1988; Handa & Linn 1993) Th formr stram argus that if companis disclos mor corporat information, thy would also attract mor long-trm invstors. This in turn will positivly influnc th markt pric and th marktability of th firm s stock, thus rducing company s cost of quity financing. Th lattr strand focuss on invstors stimations of futur cash flows. Whn dtrmining th prsnt valu of thir invstmnts, invstors focus on disclosd information to forcast Publishd by Canadian Cntr of Scinc and Education 83

2 futur cash flows. Mor information rsults in lss uncrtainty about futur cash flows and consquntly lss stimation risk, thrby lowring firm s cost of quity financing. Furthrmor, mpirical vidnc suggsts that a ngativ and significant association btwn cost of quity capital and voluntary disclosurs xists. Howvr, as nithr disclosur policy nor cost of quity capital can b dirctly obsrvd and ar highly subjctiv, mpirical work on this rlationship has documntd somwhat confusing rsults so far. For xampl, Botosan & Pluml (2002) found a positiv association btwn cost of capital and voluntary timly disclosurs, whil Gitzmann & Irland (2005) argud that a ngativ rlationship xists for th particular variabls. Botosan (1997) finds vidnc that in th US markt voluntary disclosur actions rduc cost of quity financing, but only for firms with low analyst following. Hail (2002) argus that th numbr of analysts is not that influntial on th cost of quity capital and both firms with high and low analyst following can rduc thir cost of quity financing by incrasing th lvl of disclosur. In lin with Haly t al. (1999) and Luz & Vrrcchia (2000), h suggsts that concntrating on spcific occasions and rporting nvironmnts, whr on can obsrv significant changs in firms disclosur actions, maks th subtl ffct of voluntary disclosur mor asily dtctabl. Conforming to this lattr prspctiv w focus on a low disclosur nvironmnt, as in th cas of Switzrland, in an attmpt to furthr xplor th rlationship btwn disclosurs and cost of quity financing. In our papr w try to stablish a rlationship btwn x ant costs of quity capital and voluntary corporat disclosurs. In this light our papr procds as follow: In th nxt sction w brifly discuss th thortical and mpirical litratur rviw in rlation to disclosur and th cost of quity capital. W thn prsnt our rsarch hypothss, mthodology and data sampl. This is followd by our rsarch rsults. Our papr concluds with a discussion of our findings, limitations of our work and aras for futur rsarch. 2. Litratur Rviw of Disclosur and Cost of Equity Capital Th impact of voluntary disclosur actions on th cost of quity financing has always bn an intrsting topic in th financial-accounting litratur, which can b classifid to thortical and mpirical. From a thortical point of viw, a ngativ association btwn quality of corporat rporting and cost of quity financing is obsrvd, particularly mphasizing on disclosur s ability to influnc stock markt liquidity and stimation risk. Empirical support for th suggstd association is also prsntd by a growing body of studis, trying to quantify th rlationship btwn cost of quity capital and quality of corporat disclosurs. 2.1 Thortical Litratur From a thortical prspctiv, thr ar two sparat approachs of rsarch, sustaining th gnrally accptd ngativ association btwn quality of corporat disclosur and cost of quity capital (Botosan, 1997). Th basic assumption, undrlying both approachs of thortical litratur, is that companis which provid mor corporat information rduc th information asymmtris on th capital markts. Th first approach invstigats th impact of incrasd disclosur on stock markt liquidity and th scond on links firm s rporting lvl to stimation risk. Th ida bhind th first approach is that firms voluntarily provid mor corporat information in thir attmpt to ovrcom invstors unwillingnss to hold shars in illiquid markts, and consquntly lowr thir cost of quity financing. Th othr thortical approach implis that firms try to rduc invstors stimation risk by gratr disclosur of corporat information. Dmstz (1968), on of th pionrs in this fild, argud that gratr disclosur lowrs th transaction costs and nhancs stock markt liquidity, thus lading to lowr cost of quity financing for firms on th Nw York Stock Exchang. Copland & Galai (1983), Glostn & Milgrom (1985), Amihud & Mndlson (1986) concludd that highr disclosur dcrass th advrs slction componnt of th bid-ask sprad, thus rducing th transaction costs. This incrass th liquidity of th particular stock, which rducs firm s cost of quity financing. Diamond & Vrrcchia (1991) suggst that disclosur improvs futur liquidity of firm s scuritis by rducing th information asymmtry for invstors and motivating thm to dmand largr portions in firm s stock. This in turn, rducs th company s costs of quity financing, with larg companis bnfiting th most. Ths findings complmnt th rsults rportd by Diamond (1985), who showd that in fully liquid and prfctly comptitiv markts, sharholdr s wlfar is improvd by incrasing th lvl of corporat disclosur. Baiman & Vrrcchia (1996) stablishd a link btwn th optimal lvl of disclosur quality and capital markt s liquidity nds. Thy argud that incrasd voluntary rporting nabls bttr monitoring of managrs and rducs insidr-trading opportunitis. This in turn, incrass invstors dmands for firm s scuritis, and consquntly rducs its cost of quity capital. This stm of rsarch is also supportd by Bloomfild & Wilks (2000). Th othr thortical strand hypothsizs that incrasd lvls of corporat disclosur rduc th stimation risk of an asst s futur rturn or payoff distribution, thus lowring th cost of quity capital (Botosan, 2006). Th 84 ISSN X E-ISSN

3 rasoning is that bcaus invstors bas thir stimats of rturn paramtrs only on publicly availabl information, an incras in th voluntary disclosur actions would hlp thm to bttr stimat shar rturns. Thrfor, studis following this doctrin of rsarch, also invstigat whthr paramtrs of a scurity s payoff distribution can b stimatd basd only on firm s rturn history and/or othr publicly availabl information. Barry and Brown (1985), for instanc, concntratd on asst rturns and considrd th xistnc of unobsrvabl stimation risk. Thy suggstd that du to this unobsrvabl stimation risk, firms with poor disclosur quality hav highr avrag rats of rturn pr unit of stimatd bta than larg companis with highr lvl of voluntary rporting. Cols & Lownstin (1988) furthr analyzd stimation risk in an quilibrium framwork undr uncrtainty about assts payoff distribution. Prior thortical rsarch also suggsts that at last part of th stimation risk is non divrsifiabl, as invstors hav diffrnt dgr of information for sparat scuritis and this is rspctivly pricd by th markt. For xampl, Handa and Linn (1993) showd, using th Arbitrag Pricing Modl, that invstors attribut mor systmatic risk to an asst with low information (.g. poor disclosur quality) than to an asst with high information, lading to lowr dmand and prics for ths shars. Thy also supportd Barry and Brown s (1985) prspctiv that invstors stimation risk, rflctd in futur xpctd rturns, is oftn unobsrvabl. In gnral, th rlatd rsarch suggsts that highr disclosur lvls rduc th stimation risk, arising from invstors fforts to stimat assts xpctd rturn and payoff distribution. This stram of rsarch is also supportd by th rlativly rcnt study of Lambrt t al (2007), who suggst that highr corporat disclosur quality influncs not only invstor s prcption of futur xpctd rturns; it also nabls thm to affct firm s futur dcisions and cash flows. 2.2 Empirical Litratur Basd on th abov thortical background, a numbr of studis hav mpirically invstigatd th rlationship btwn cost of quity capital and diffrnt typs of voluntary disclosur actions. Botosan (1997) and Hail (2002) concntratd on aggrgat disclosurs basd on slf-dvlopd indics, whil Botosan & Pluml (2002) and Gitzmann & Irland (2005) wr mor intrstd in timly disclosur actions and Richardson & Wlkr (2001) distinguishd btwn financial and social disclosurs. Botosan (1997) documntd ngativ and significant association btwn cost of capital and lvl of corporat disclosur for companis with low analyst following. Hr mpirical analysis indicatd that firms with highr disclosur scors can rduc thir cost of quity capital by approximatly 2.8% rlativ to firms with lowr disclosur scors. Sh argud that, in th rich US disclosur nvironmnt, voluntary rporting actions ar not influntial on th cost of quity financing for firms that attract high analyst following. Hail (2002) suggstd that th subtl ffct of incrasd rporting on cost of capital is mor asily dtctd whn th mandatd lvl of disclosur is low and firms hav considrabl rporting discrtion. Using a sampl of 73 Swiss (low disclosur nvironmnt) listd companis, h also found a ngativ association btwn cost of capital and disclosur actions, and rportd that high-disclosing companis njoy about 1.8 % to 2.4% lowr cost of quity financing compard to low-disclosing companis. Francis t al. (2005), using a sampl of companis from 34 mrging and dvlopd countris, also confirmd th xpctd ngativ association and providd mpirical vidnc that firms with highr xtrnal financial nds gnrally disclos mor information and this lads to rduction of thir cost of quity capital. Richardson & Wlkr (2001) xamind th impact of social and financial disclosur actions on firm s cost of quity financing. For a sampl of Canadian firms, thy found out that th cost of quity financing is ngativly associatd with voluntary financial disclosurs and positivly rlatd to social rporting actions. Ths rsults imply that companis, which disclos mor social information, ar pnalizd by th markt by charging thm highr cost of quity capital. Botosan & Pluml (2002) invstigatd th rlationship btwn cost of capital and annual rport disclosurs, timly disclosurs (quartrly or othr publishd rports) and invstor rlations disclosurs. Whil confirming th xpctd ngativ association for th annual rport disclosurs, thir rsarch showd that cost of capital is positivly rlatd to timly rporting actions, which could b attributd to th fact that timly disclosurs incras th volatility of shar prics by attracting transint invstors who trad aggrssivly on short-trm arnings. Morovr, thy did not find association btwn cost of quity financing and invstor rlations disclosurs. Gitzmann & Irland (2005) criticizd Botosan & Pluml s (2002) outcoms, claiming that th positiv rlationship btwn quartrly rporting and cost of capital is a rsult of inappropriat masurmnt of timly disclosurs. Thy found that cost of quity capital is ngativly rlatd to th quality of timly disclosurs for firms Publishd by Canadian Cntr of Scinc and Education 85

4 with aggrssiv accounting policy choic on th UK markt. Thir findings wr furthr supportd by Espinosa & Trombtta (2007) who studid firms with aggrssiv accounting policy choic on th Spanish markt. Othr studis usd mor indirct masurs for th cost of quity capital and th quality of voluntary disclosur. Wlkr (1995) usd analysts ratings of ovrall disclosur policy and confirmd that companis with highr ratings (and rspctivly highr disclosur) hav gnrally lowr bid-ask sprads (costs of capital). This is also supportd by Luz and Vrrcchia (2000), who considrd th switching from th local (Grman) GAAP to IFRS or US GAAP as a sign for incrasd voluntary disclosur, and provd that this chang dcrasd th bid-ask sprads for firms on th Grman markt. Cuijprs and Buijink (2005) also confirmd th xpctd association, but only for firms with high analyst following, whil Dask (2006) found no mpirical vidnc that Grman firms, adopting highr disclosur standards, rduc thir cost of quity financing. 3. Hypothss Dvlopmnt As prior rsarch suggsts, incorporating highr lvls of disclosur hlps to rduc th information asymmtris. This should lad to improving invstors capabilitis in forcasting futur growth rat, and consquntly, dcras th stimation risk and information asymmtry componnts of a firm s cost of quity capital. Thus, th following hypothsis mrgs: H 1 : Thr is a ngativ rlationship btwn th xpctd cost of quity capital and th quality of corporat disclosur As Hail (2002) concluds, thr ar four major problms whn documnting th abov statd hypothsis mpirically. First of all, th quality of corporat disclosur rlis havily on th individual prcption of th rsarchr, so it contains an important dgr of subjctivity. Furthrmor, companis might not slct thir lvl of disclosur indpndntly, and this maks th variabl subjct of slf-slction bias. Th firm s cost of capital and its componnts cannot b dirctly obsrvd and thy also hav a crtain dgr of subjctivity. Finally, th rlationship of disclosur lvl and markt s profitability xpctations might b subjct to diffrnt factors so that no considrabl association is obsrvd. Thus, our study aims to dal with ach of th abov mntiond concrns. Howvr, prvious mpirical work fails to fully clarify th rlationship btwn cost of quity capital and voluntary corporat disclosurs. Botosan (1997) and Botosan & Pluml (2001), for xampl, found a significantly ngativ rlationship only for firms with low analyst following, but not for thir ntir sampl. Thus, in lin with Espinosa & Trombtta (2007) this study aims to invstigat if aggrssiv firms hav mor incntivs to diffrntiat thmslvs by incrasing th lvl of disclosur than companis with consrvativ accounting policy. Thrfor, th following hypothsis is tstd: H 2 : Th rlationship btwn cost of quity capital and disclosur dpnds on th firm s accounting policy. which splits to: H 2A : Thr is a significant ngativ rlationship btwn cost of quity capital and disclosur for firms with aggrssiv accounting policy, and H 2B : no rlationship xists btwn cost of capital and disclosur for companis choosing a consrvativ rporting stratgy. 4. Mthodology and Data Slction 4.1 Masurmnt of Implid Cost of Equity Capital Th Rsidual Incom Valuation Modl is adoptd in ordr to comput th implid cost of capital. Th modl applid hr was first suggstd by Hail (2002) and furthr usd in Espinosa & Trombtta (2007). Th intrinsic valu of ach firm is masurd by a thr-stag, originally dscribd by L t al (1999) and Gbhardt t al (2001). First, th xplicit arnings forcasts ar collctd for th nxt thr yars; thn, th arnings forcasts ar calculatd by linarly fading yar t+3 Rturn on Invstmnt (ROE) to th mdian Swiss markt ROE by th yar t+t; and finally, th trminal valu is stimatd by assuming th latst Rsidual Incom (RI) as prptuity. This approach dals with th Rsidual Incom Modl s (RIM) most significant problm- th rquirmnt of forcastd futur arnings and book valus of quity to infinity- and lads to th following finit tim spcification: P t bv t n k1 ( x k1 r bv tk1 k (1 r ) ) T kn1 ( x k1 r bv tk1 k (1 r ) ) ( x t13 r bv r (1 r ) ) tk1 12 (1) whr: 86 ISSN X E-ISSN

5 P t = bv t = x t+k = markt pric of company s stock at dat t accounting book valu pr shar at th bginning of th yar xpctd futur accounting arning pr shar for priod (t+k-1, t+k), xplicitly forcastd, acquird by linar fading rat or assumd constant (Hail, 2002) r = th implid cost of quity capital, which solvs quation (1) bv t+k = xpctd futur accounting BVE. It is assumd that th clan-surplus rlationship holds and th bv t+k = bv t+k-1 + x t+k Dividnds t+k In this particular approach, th markt pric of firm s stock is st qual to th currnt Book Valu of Equity (BVE) plus RI ovr short-trm priod of analysts forcasts, mdium-trm fading priod and long-trm prptuity. In ordr to implmnt it, svral proxis ar usd for currnt and futur accounting numbrs. Jun 30, 2008, is st as our obsrvation dat, bcaus by this point all companis wr supposd to hav rlasd thir annual rports for fiscal 2007, with analysis bing basd only on publicly availabl information (Hail, 2002). In our papr, in accordanc to Gbhardt t al (2001), th currnt stock pric is st qual to th intrinsic valu of th company. For this rasons particular car is takn whn choosing this.. Prior mpirical work suggsts that choosing an qually wightd avrag stock pric for th obsrvation month dlivrs a bttr proxy for th intrinsic valu of th firm, than arbitrary choosing th closing pric of a singl day (Gbhardt t al, 2001). Howvr, Hail (2002) stimats th cost of quity capital using both typs of proxis and concluds that rsults ar insnsitiv to altrnativ pric spcifications. Thrfor, th closing pric for Jun, 2008, is chosn as proxy for th intrinsic valu of ach company. Thus, th valuation formula (1) taks th following format, which is applid to ach company: 3 k 1 12 ( xk 1 r bvt k 1) ( xk 1 r bvt k 1) ( xt 13 r bvt 12) P Jun bvt (2) k k 12 (1 r ) (1 r ) r (1 r ) Th following mthodology is usd to stimat futur accounting arnings,: (1) analysts consnsus forcasts as accounting arnings for fiscal 2008 and 2009 ar slctd; (2) for fiscal 2010 xpctd accounting arnings ar stimatd by multiplying on plus analysts consnsus long trm growth forcast with last yar s forcastd arnings pr shar; (3) for yars 2011 up to 2019 xpctd accounting arnings ar calculatd by multiplying th last yar s book valu pr shar with th ffctiv ROE. Th ffctiv ROE is th ratio btwn currnt arnings pr shar (EPS) and last yar s BVE. (4) Th 2019 yar s arnings pr shar ar finally usd as EPS proxy for prptuity. Th book valu of quity for ach yar is calculatd by solly assuming that th clan-surplus rlationship holds. Th clan-surplus rlationship stats that all gains and losss ar includd in th nt incom (arnings pr shar in this cas), and th book valu pr shar is only subjct to last yar s book valu, arnings and dividnds. As book valu pr shar for 2008 w us th common sharholdr quity for th bginning of th yar, dividd by th numbr of outstanding shars, downloadd from DataStram. Th dividnds ar computd as a fraction of th arnings pr shar for th particular yar. For ach firm, w calculat a dividnd payout ratio, basd on th company s avrag dividnd payout ovr th last fiv yars. W us th following stimation formula: k 4 5 k1 1 DPSk DividntPa youtratio 5 (3) EPS For th implmntation of th RIM w us xplicit fixd forcast horizon, consisting of twlv futur priods. Th targt accounting rturn on quity is 9.59% and is stimatd as th mdian of past rturns from all companis, listd on th Swiss Exchang, ovr th last fiv yars. Each company s ffctiv ROE fads linarly to th targt Swiss markt ROE. Th sam approach has bn applid whn stimating th x ant cost of quity capital for all 121 companis. Equity prics and accounting numbrs hav bn collctd though DataStram. Earnings forcasts and analyst data ar collctd from I/B/E/S Intrnational databas on DataStram or Wharton Rsarch Data Srvics. 4.2 Masurmnt of Quality of Corporat Disclosur Th masurmnt of a firm s disclosur quality is basd on th amount of voluntary disclosur providd in th annual rport to sharholdrs. Among all channls of corporat communication, th annual rport was slctd bcaus it should srv as bst stimat for ovrall quality of voluntary disclosurs providd by a firm. This is partly du to th fact that annual rport disclosur lvls ar positivly corrlatd with th amount of disclosur, communicatd though othr mdia (Lang & Lundholm, 1993), suggsting that companis coordinat thir ovrall k Publishd by Canadian Cntr of Scinc and Education 87

6 disclosur policy. Furthrmor, th annual rport is gnrally considrd as th most important sourc of corporat information (Knutson, 1992). Morovr, it is th on communication channl, ovr which th managmnt has complt control and is not subjct to distortions by othr mdia (Guthri & Parkr, 1989). Howvr, rsults from disclosur masurs, basd solly on annual rports, should b intrprtd with caution. Dspit th positiv corrlation of disclosur mans, th marginal ffct of voluntary rporting in th annual rport could b ovrstatd. Th outcoms ar likly to rflct th ffct of all mans of voluntary disclosurs and not th annual rport alon (Botosan, 1997). Our disclosur masur, rfrrd hr as DPNTS, is basd on qustionnair and is dvlopd in a similar way as in Botosan (1997). Th issus includd in th qustionnair rly on a study conductd by th Swiss Banking Institut (SBI) at th Univrsity of Zurich. DPNTS is basd on th voluntary information companis publish with rspct to Swiss accounting law and Swiss GAAP in thir 2008 annual rport to sharholdrs. This lavs managmnt with considrabl discrtion in dtrmining th firm s disclosur policy. Th authors original goal was to idntify all information itms, voluntarily providd in th annual rport to sharholdrs, and to diffrntiat thm from thos, whos disclosur is compulsory by th SWISS GAAP. Howvr, this procdur provd to b rathr unralistic and, thrfor, this rsarch focus only on aspcts discussd by th SBI in thir survy. Ths itms ar considrd as most informativ for financial-statmnt usrs in thir dcision-making procss. DPNTS consists of thr typs of voluntary disclosurs (s Appndix): (1) Background and ky non-financial disclosur (DPNTS_1); (2) trnd analysis and managmnt discussion (DPNTS_2); (3) risk, valu-basd and forcastd information (DPNTS_3). Two points ar assignd to ach of th 27 itms if th managmnt provids a dtaild rprsntation, including quantitativ information and qualitativ discussion, on point if it is only brifly mntiond in th annual rport and zro othrwis. Th total absolut scor is computd by th following formula: DPNTS 3 t SCORE t (4) t 1 In ordr to mak th rgrssion cofficints asir to intrprt, th fractional rank of a company s disclosur is usd (DISCL), which is also lss snsitiv to outlirs. Th fractional rank is stimatd as th disclosur scor DPNTS dividd by th numbr of firms 121 and incrass with th disclosur quality. Using absolut disclosur valus DPNTS dos not qualitativly chang th rsults. 4.3 Othr Indpndnt Variabls Th x ant cost of quity capital is simply a thortical masur and its rlvanc nds to b additionally justifid. On rasonabl way to do this is to invstigat its rlationship with othr masurs that rflct companis various risk factors. Numrous prior studis in this fild, such as Botosan (1997), Botosan & Pluml (2002), Hail (2002), Luz & Hail (2006), mploy diffrnt accounting and markt-basd risk proxis to justify th rlvanc of th x ant cost of quity capital. Basd on thir rsarch and taking into considration thir rsults, thr additional risk factor masurs wr includd in our mpirical rsarch: th firm s lvrag, its siz and markt bta Lvrag Th firm s lvrag srvs as a proxy for th firm s financial risk. Prior rsarch indicats that th amount of dbt and its capital structur is an incrasing function of th company s cost of quity capital and highr dbt is, thrfor, associatd with highr volatility of futur arnings (Gbhardt t al, 2001; Hail, 2002). Numrous othr studis hav also invstigatd this link and also obsrvd a positiv rlation btwn th x ant cost of capital and th firm s lvrag (Luz & Hail, 2006; Guay t al, 2005). Howvr, du to information asymmtris, it is still unclar if highr dbt announcmnts ar a good or bad nws for th invstors. As a proxy for firm s financial lvrag, th ratio of total dbt to markt valu of outstanding quity at th bginning of 2008 (LEV) is usd Bta Th stock s markt bta srvs as a proxy of th firm s systmatic or markt risk. Th Capital Asst Pricing Modl (CAPM) suggsts that th bta should b positivly corrlatd with th cost of quity capital. Som studis, such as th on of Hail (2002), confirm th rlation for Switzrland or othr countris (Luz & Hail, 2006). Howvr, othr studis, such as of Gbhardt t al (2001), fail to consistntly show th xpctd rlationship. In ordr to stimat th markt bta (BETA) a Markt Modl rgrssion is applid, rquiring at last 24 wkly rturn obsrvations in a two yar priod ndd Jun 30, As a bnchmark th Swiss Markt Indx is mployd. 88 ISSN X E-ISSN

7 4.3.3 Siz As prior rsarch indicats, firm siz srvs as a proxy for information availability. Biggr firms provid gnrally mor information than th smallr firms which lads to lowr risk, rgarding futur arnings, and also implis lowr cost of quity capital. As a proxy for th firm s siz th markt valu of outstanding quity at th bginning of 2008 (MARKET, in CHF millions) is slctd. For th final rgrssion, th natural logarithm of th outstanding quity is mployd bcaus th rsults ar lss snsitiv to influnc of outlirs and th cofficints ar asir to intrprt Accounting Policy A masur of firm s accounting policy choic, ithr aggrssiv or consrvativ, is ncssary in ordr to tst hypothsis H 2. Th classification is basd on companis annual rports for 2008 according to th following critria: bad dbt, bad invstmnt, invntory and gnral risk provisions; which, aftr thorough rsarch, wr considrd as th most suitabl (Espinosa & Trombtta, 2007). Thn, four ratios wr dtrmind for ach company by dividing th abov provisions by total rcivabls, total financial assts, total invntory, and total liabilitis, rspctivly. Th mdian of ths ratios srvs as a critrion to dtrmin th typ of accounting policy. If mor than two ratios wr blow thir mdian valu for a particular firm thn this firm was considrd to follow an aggrssiv accounting policy. A dummy variabl was cratd (D AGG ) whos valu is on in this cas and zro othrwis. Th rasoning bhind our masur is that companis, whos provision ratios ar lowr, may hav incntivs to incras thir annual arnings mor than companis with highr provision ratios, which can b indicativ of a mor aggrssiv accounting policy (Espinosa & Trombtta, 2007). 4.4 Data Collction Our papr focuss on a low disclosur nvironmnt. Switzrland appars particularly appropriat for such kind of analysis, sinc Swiss companis hav considrabl rporting discrtion and thr mandatd lvl of disclosurs is notably low. Th only rquirmnt for companis to b listd on th local xchang is complianc with Swiss GAAP, which lavs firms with significant frdom in choosing thir voluntary disclosur policy. Furthrmor, a numbr of prior studis also focus on Switzrland, or includ it in a mor intrnational sampl, as th local stock markt displays many common faturs of a typical markt in continntal Europ and managmnt rlis havily on sharholdrs valu in thir attmpt to improv firm s ovrall financial situation. Thrfor, this spcific rsarch nvironmnt should mak th subtl ffct of incrasd voluntary disclosurs on firms cost of quity capital mor asily dtctabl. Totally, thr ar 334 companis listd on th Swiss Stock Exchang. Th list of firms includs highst capitalizd Swiss companis, along with som small publicly hld companis, trading on th local xchang. This sampl of firms implis that a positiv bias in a potntial disclosur scor may xist, bcaus disclosur quality is positivly corrlatd with company s markt valu (Lang & Lundholm, 1993). Disclosur quality is ngativly rlatd with th firm siz and larg companis ar gnrally assumd to hav a richr information nvironmnt in trms of mdia and analyst covrag. Howvr, if thr is a sufficint cross-sctional variation in th disclosur scor, this should not caus problms for th mpirical rsarch. Our original sampl consistd of all 334 companis listd on th Swiss Stock Exchang SWX. Out of thm, 150 wr droppd bcaus no propr stock or forcastd information is availabl on DataStram and I/B/E/S Intrnational. Anothr 10 firms wr xcludd bcaus thir fiscal yar dos not nd on Dcmbr 31, 2007 or within th first quartr of For 35 companis a full annual rport onlin could not b found, so it was rqustd via -mail. Howvr, 31 faild to rply on tim or at all and, thrfor, thy wr also xcludd from th sampl. In lin with Hail (2002), our sampl includs companis from various industris. Contrary to Botosan (1997), who rstricts hr sampl on companis from a particular industry, w bliv that a cross-sctional sampl dlivrs mor consistnt and rasonabl rsults. Howvr, 22 companis wr xcludd from banking, invstmnt and insuranc sctor, bcaus thir disclosur practics ar havily influncd by rgulatory rquirmnts and thir businss diffrs significantly from othr industris. As illustratd on Tabl 1, th sampl slction procdur yilds a total of 121 non-financial companis listd on th Swiss Stock Exchang SWX. Finally, Tabl 2 provids dscriptiv statistics for th sampl. 5. Empirical Analysis Th cost of quity capital and quality of corporat disclosur ar both highly subjctiv variabls, rlying havily of rsarchr s individual prcption rathr than actual us. Thrfor, th validity of ths proxis, of th disclosur masur and of th cost of capital was initially assssd and confirmd, bfor tsting th hypothss. 5.1 Assssmnt of Validity of th Disclosur Scor Prior studis such as of Marston & Shrivs (1991), Lang & Lundholm (1993), Botosan (1997), Botosan & Pluml (2001), and Hail (2002), confirm that disclosur indics ar a usful rsarch tool and usually lad to rasonabl and Publishd by Canadian Cntr of Scinc and Education 89

8 significant rsults. Howvr, thy suffr from subjctivity. Thus, th validity of th disclosur masur DPNTS was assssd in thr diffrnt ways. First positiv and highly significant corrlation cofficints btwn DPNTS and its thr componnts wr found (s Tabl 3). Howvr, th cofficints among th componnts thmslvs wr considrably lowr than th ons including DPNTS, which implis that th thr catgoris may rflct diffrnt aspcts of disclosur. Scond, th rlationship btwn DPNTS and th following variabls was stimatd: MARKET, markt valu of outstanding quity (in CHF millions); RETURN, avrag ralizd ROE for th sampl of firms ovr last svral yars; CR_LIST, dummy variabl qual to on if company s shars ar multipl listd or zro othrwis; LEV, financial lvrag masurd as th ratio of total dbt to markt valu of outstanding quity at th bginning of 2008; and AUDIT, dummy variabl qual to on if a firm is auditd by a BIG SIX audit company or zro othrwis. To diminish th influnc of outlirs, th log transformations of th markt valu of outstanding quity wr usd instad of absolut valus. MARKET, RETURN and AUDIT show a positiv and highly significant corrlation with th disclosur variabl DPNTS (Tabl 3). Howvr, CR_LIST and LEV do not show a significant rlationship with DPNTS, which it implis that th highly lvrd Swiss companis do not sm to look for options to rduc thir monitoring costs by disclosing mor information. Finally, th multivariat analysis of th rlationship btwn firm s fractional disclosur scor DISCL and th othr firm spcific charactristics showd that, whil RETURN and AUDIT variabls rmain positiv and statistically significant, MARKET loss its xplanatory powr. Approximatly 53% of th variation in th disclosur scor is xplaind by variabls includd in th rgrssion modl (Tabl 4). Thus, th validity of th disclosur masur is confirmd. 5.2 Assssmnt of Validity of Ex ant Cost of Equity Capital Estimat A valid cost of capital stimat should b an incrasing function of th risk, as masurd by markt bta and financial lvrag, and it should also display a wll known siz ffct (Botosan, 1997; Botosan and Pluml 2002; Hail, 2002). Th validity of th x-ant cost of quity capital stimat is assssd by th OLS rgrssion analysis (Tabl 5). ROE, th proxy of futur xpctd cost of quity capital, is th dpndnt variabl and BETA, LEV and MARKET ar th indpndnt or xplanatory variabls. To diminish th influnc of outlirs, th log transformations of th markt valu of outstanding quity wr usd instad of absolut valus. All cofficints confirmd th xpctd rlationship, documntd by prior studis (Botosan, 1997; Gbhardt t al, 2001; Botosan and Plum, 2001; Hail, 2002). Markt bta and financial lvrag ar positivly rlatd to th cost of quity capital, whil firm s siz shows a ngativ association. With on xcption, all cofficints ar significant at last at 10%. Ths rsults togthr confirm th validity of our cost of capital proxy. Howvr, as indicatd on panl B, th maximum adjustd R 2 is 34.3%, which mans that considrabl variation in th cost of capital still rmains unxplaind. 5.3 Empirical Analysis of Hypothsis On Prior studis confirm th xpctd ngativ rlationship btwn cost of quity capital and quality of corporat disclosur (.g. Botosan, 1997; Botosan and Pluml, 2001; Hail, 2002; Luz and Hail, 2006). Tabl 6 provids Parson corrlation cofficints btwn our cost of capital stimat and firm-spcific charactristics, including markt and financial risk BETA and LEV, fractional disclosur scors DISCL and firm siz MARKET. Th corrlation btwn our proxy of futur xpctd cost of capital and th quality of corporat disclosur DISCL is and highly significant at all lvls according to th two-tail tst of statistical significanc. This rsult is consistnt with th statmnt that cost of quity capital dcrass as th quality of corporat disclosur incrass. As prior studis documnt, cost of quity capital should corrlat positivly with markt bta and financial lvrag and ngativly with firm s siz (Botosan, 1997; Botosan and Pluml, 2001; Luz and Hail, 2006). Our corrlation cofficints confirm th xpctd association and ar all statistically significant, xcpt for th LEV variabl, which dos not show any xplanatory powr at all. All of th corrlation cofficints ar lss than 0.5, which indicats that multicollinarity should not b a problm, if including all variabls in th sam modl. Thrfor, hypothsis on is tstd by taking all variabls into considration and using th following rgrssion modl: Cost of Capital i = α + β 1 MarktRisk i + β 2 FirmRisk i + β 3 Disclosur i + β 4 Siz i + ε i (5a) Or mor spcifically: ROE i = α + β 1 BETA i + β 2 LEV i + β 3 DISCL i + β 4 ln(market i ) + ε i (5b) 90 ISSN X E-ISSN

9 Tabl 7 provids th rsults from a simpl OLS rgrssion of th quation illustratd abov. All cofficints confirm th xpctd signs. BETA and LEV ar positivly rlatd to th ROE and confirm Hail s (2002) conclusion that cost of quity capital is positivly rlatd to systmatic and financial risk in th Swiss markt. Th cofficints ar conomically rlvant and statistically significant according to th two-tail tst mployd in this study. As xpctd, th firm s siz is ngativly associatd to th cost of quity capital, implying that th particular variabl might also captur som othr not closly dfind influncs. Evntually, th voluntary disclosur quality, DISCL, is ngativly rlatd to our cost of capital masur. All cofficints ar rlvant at all lvls of statistical significanc using two-tail tsts. Ths rsults confirm that by improving thir disclosur quality, firms can rduc thir cost of quity capital. Th claim holds vn aftr controlling for cross-sctional variation in markt bta, financial lvrag and company siz. Th cofficints on DISCL rang from to , implying that companis in th sampl, with highr fractional disclosur scor, njoy cost rduction somwhr btwn 11.5% and 14.8% compard to companis that choos lowr lvls of voluntary corporat disclosur. Th particular rgrssion modl is also stimatd using absolut disclosur scor, DPNTS, instad of th fractional scor DISCL. This analysis indicats that on unit incras in th absolut disclosur scor DPNTS rsults in a rduction in cost of quity capital of 0.1%. In ordr to illustrat th magnitud of ths rsults, w considr th following xampl. SIKA AG, oprating in th construction and matrials industry, rcivs a total of 37 points, which is th highst scor, awardd in th sampl. In its 2008 annual rport, th company provids xtnsiv qualitativ and quantitativ information on background, non-financial and valu-basd information. On intrprtation of ths rsults would imply that by providing this information, holding all ls qual, SIKA AG has rducd its cost of quity capital by approximatly 3.7% (i.. 37 * 0.1%) rlativ to a company that providd poor background and non-financial information and no valu-basd discussion. Th rsults ar not only statistically significant, but also conomically rlvant. Howvr, ths findings should b intrprtd with caution for two diffrnt rasons. First, including disclosur quality proxy in th modl incrass th adjustd R 2 to a maximum of 43.8%. This mans that significant variation in th cost of capital still rmains to b xplaind othrwis. And scond, givn th slf-slction of disclosur policy is an issu, simpl OLS analysis would ovrstimat th ffct of corporat rporting quality on company s cost of quity capital. 5.4 Empirical Analysis of Hypothsis Two According to hypothsis two th influnc of voluntary disclosur actions on cost of quity capital dpnds on firm s accounting policy choic. Mor spcifically, H 2A stats that companis, adopting aggrssiv corporat rporting, might look unrliabl to potntial invstors and ar likly to hav highr cost of quity capital. Thy would, thrfor, voluntarily provid mor information in an attmpt to rduc this ffct. On th othr hand, according to H 2B companis choosing consrvativ accounting policy gnrally ngag in highr disclosur lvls and additional voluntary rporting might not b that influntial on thir cost of quity capital. In ordr to tst H 2, two diffrnt rgrssion modls wr usd. Th first on invstigatd th impact of voluntary disclosur actions on cost of quity capital for firms with aggrssiv accounting policy choic (H 2A ): ROE i = α + β 1 BETA i + β 2 LEV i + β 3 D AGG i DISCL i + β 4 ln(market i ) + ε i (6) To distinguish btwn firms with diffrnt accounting policy, th dummy variabl D AGG i is mployd which quals on if th company has aggrssiv rporting stratgy and zro othrwis. Th intraction trm is also includd alon to dtrmin whthr aggrssiv firms try to countract th potntially ngativ ffct of thir rporting choic by adopting highr lvls of disclosur quality. All cofficints confirm th xpctd signs (Tabl 8). It sms that aggrssiv firms rduc thir cost of quity capital by improving th quality of thir voluntarily disclosd information. Howvr, th cofficint bfor th intraction trm, dspit positiv, is statistically insignificant, which indicats that aggrssiv companis do not ncssarily provid this information to compnsat for th ffcts of thir accounting policy choic. In ordr to furthr invstigat th validity of H 2B, th rlationship btwn cost of quity capital and quality of corporat disclosur is xamind for companis with consrvativ accounting policy, using th following rgrssion modl: ROE i = α + β 1 BETA i + β 2 LEV i + β 3 DISCL i + β 4 D CONS i DISCL i + β 5 ln(market i ) + ε i (7) In ordr to distinguish btwn aggrssiv and consrvativ firms, w rvrs th valu of th dummy variabl from th prvious spcification and us D CONS with valu of on for consrvativ companis and zro othrwis. Th rsults show that disclosur quality, dspit insignificant for consrvativ firms, is statistically rlvant at a gnral lvl (Tabl 9). Thus, it could b concludd that firms on th Swiss markt can rduc thir cost of quity capital by Publishd by Canadian Cntr of Scinc and Education 91

10 incrasing th lvl of voluntary disclosurs, rgardlss of thir accounting policy choic. Thrfor, hypothsis two is rjctd. 6. Discussion and Conclusions In this study w documnt ngativ and highly significant rlationship btwn our proxy of futur xpctd cost of capital ROE and DISCL, companis fractional disclosur scor. Th rsults hold vn aftr adjusting for systmatic risk, financial risk and firm siz. This statistically strong association may b partially xplaind by th diffrnt institutional factors btwn capital markts with divrgnt disclosur rquirmnts. Our findings support th opinion of Luz and Vrrcchia (2000), that th conomic consquncs of incrasd voluntary rporting ar asir to dtct in a low disclosur nvironmnt. Our rsults also confirmd th xpctd ngativ rlationship btwn disclosur quality and cost of quity capital for firms with aggrssiv rporting choic, but th insignificant cofficint bfor th intraction trm implis that this ffct might not b rsult of company s ffort to compnsat for th potntially ngativ ffct of its rporting stratgy. Our analysis also rvald that this ngativ rlationship btwn disclosur quality and cost of quity capital xists as wll for consrvativ firms. Thus, it could b concludd that th accounting policy choic dos not influnc th rlationship btwn cost of quity capital and quality of corporat disclosur, at last on th Swiss markt. 7. Study Limitations and Rcommndations This study provids som important insights to financial xcutivs and rgulators, rvaling that incrasd lvls of disclosur rsult in infrior cost of quity capital, rgardlss of firm s accounting policy choic. Furthrmor, this study introducs a procdur of constructing a cost of capital proxy, incrasing in markt bta and dcrasing in firms siz. This procdur may b furthr usd in futur studis, in which firm-spcific cost of quity capital stimats ar rquird and analyst forcast data is availabl. Th analysis and rsults rportd hr ar limitd to a rlativly small sampl of 121 companis in a singl markt during on-yar priod. Thrfor, all conclusions should b intrprtd with caution and th rsults should not b gnralizd to othr markts or othr tim horizons. To rduc potntial distortions du to ndognous bias, futur work should focus on bttr undrstanding of th dtrminants of firm s voluntary rporting bhavior. By incrasing th tim horizon, for instanc, on can invstigat th chang of disclosur lvl ovr tim and its influnc on firm s risk situation. To diminish distortions from sampl slction bias, similar approach may b mployd to study th particular rlationship from a mor intrnational point of viw, by including companis form diffrnt countris and diffrnt corporat rporting nvironmnts. Rfrncs Amihud, Y., & Mndlson, H. (1986). Asst pricing and bid-ask sprad. Journal of Financial Economics, 17(2), Baiman, S., & Vrrcchia, R. (1996). Th rlation among capital asst markts, financial disclosur, production fficincy, and insidr trading. Journal of Accounting Rsarch, 34(1), Barry, C., & Brown, S. (1985). Diffrntial information and scurity markt quilibrium. Journal of Financial and Quantitativ Analysis 20, Bloomfild, R., & Wilks, T. (2000). Disclosur ffcts in th laboratory:liquidity, dbt, and cost of capital. Th Accounting Rviw, 75 (1), Botosan, C. A., & Pluml, M. A. (2002). A rxamination of disclosur lvl and xpctd cost of quity capital. Journal of Accounting Rsarch, 40, Botosan, C. (1997). Disclosur lvl and th cost of quity capital. Accounting Rviw 72, Botosan, C. (2006). Disclosur and th Cost of Equity Capital. What Do W Know? Accounting and Businss Rsarch, Intrnational Accounting Policy Forum, pp Cols, J., & Lownstin, W. (1988). Equilibrium pricing and portfolio composition in th prsnc of uncrtain paramtrs. Journal of Financial Economics, Copland, T., & Galai, D. (1983). Information ffcts on th bid-ask sprad. Th Journal of Financ 36:, Cuijprs, R., & Buijink, W. (2005). Voluntary adoption of non-local GAAP in th Europan Union: A study of dtrminants and consquncs. Europan Accounting Rviw, 14 (3), ISSN X E-ISSN

11 Dask, H. (2006). Economic bnfits of adopting IFRS or US-GAAP Hav th xpctd costs of quity capital rally dcrasd? Journal of Businss Financ and Accounting, 33 (3-4), Dmstz, H. (1968). Th cost of transacting. Quartrly Journal of Economics 82 (Fbruary):, Diamond, D. (1985). Optimal rlas of information by firms. Journal of Financ, 40, Diamond, D., & Vrrcchia, R. (1991). Disclosur, liquidity and th cost of quity capital. Th Journal of Financ (Sptmbr), Espinosa, M., & Trombtta, M. (2007). Disclosur intractions and th cost of quity capital: Evidnc from th Spanish Continuous Markt. Journal of Businss Financ and Accounting, 34 (9&10), Francis, J. R., Khurana, I. K., & Prira, R., (2005). Disclosur incntivs and ffcts on cost of capital around th World. Th Accounting Rviw, Vol 80, No 4, pp Gbhardt, R., L, C., & Swaminathan, B. (2001). Toward an implid cost of capital. Journal of Accounting Rsarch 39, Glostn, L., & Milgrom, P. (1985). Bid ask and transaction prics in a spcialist markt with htrognously informd tradrs. Journal of Financial Economics, Gitzmann, M., & Irland, J. (2005). Cost of capital, stratgic disclosurs and accounting choic. Journal of Businss Financ & Accounting, 32 (3 & 4), Guay, W., Kothari, S., & Shu, S. (2005). Proprtis of implid cost of capital using analysts' forcasts. MIT Sloan Working Papr No Guthri, J. & Parkr, L. (1989). Corporat social rporting: A rbuttal of lgitimacy thory. Accounting and Businss Rsarch, vol. 19, Hail, L. (2002). Th impact of voluntary corporat disclosurs on th x-ant cost of capital for Swiss firms. Europan Accounting Rviw 11(4), Handa, P., & Linn, S. (1993). Arbitrag pricing with stimation risk. Journal of Financial and Quantitativ Analysis, 28 (1), Haly, P., Hutton, A., & Palpu, K. (1999). Stock prformanc and intrmdiation changs surrounding sustaind incrass in disclosur. Contmporary Accounting Rsarch, 16 (3), Knutson. (1992). Financial Rporting in th 1990's and Byond. Association for Invstmnt Managmnt and Rsarch. Lambrt, R., Luz, C., & Vrrcchia, R. (2007). Accounting Information, Disclosur, and th Cost of Capital. Journal of Accounting Rsarch, Vol. 45, Is. 2, pp Lang, M., & Lundholm, R. (1993). Cross-sctional dtrminations of analyst ratings of corporat disclosur. Journal of Accounting Rsarch, 31 (2), L, C., Myrs, J., & Swaminathan, B. (1999). What is th intrinsic valu of th Dow? Journal of Financ, 54(4), Luz, C., & Hail, L. (2006). Intrnational Diffrncs in th Cost of Equity Capital: Do Lgal Institutions and Scuritis Rgulation Mattr? Journal of Accounting Rsarch 44, Luz, C., & Vrrcchia, R. (2000). Th conomic consquncs of icrasd disclosur. Journal of Accounting Rsarch, 38(Supplmnt), Marston, C., & Shrivs, P. (1991). Th us of disclosur indics in accounting rsarch: A rviw articl. British Accounting Rviw, 23, Richardson, A. J., & Wlkr, M. (2001). Social disclosur, financial disclosur and th cost of quity capital. Accounting, Organisations and Socity, 26 (7-8), Publishd by Canadian Cntr of Scinc and Education 93

12 Wlkr, M. (1995). Disclosur policy, information asymmtry and liquidity in quity markts. Contmporary Accounting Rviw, 11 (2), Tabl 1. Summary of Sampl Slction Procdur Numbr Prcnt Firms listd on th Swiss Stock Exchang % Firms not followd by I/B/E/S Intrnational (no financial analysts forcast data availabl) % Firms with fiscal yar nd not on Dcmbr 31, 2007, or not within th first quartr of % 2008 Firms for with no full annual rport was found % Firms availabl for analysis % Financial institutions (banking, invstmnts and insuranc companis) % Total numbr of sampl firms % Tabl 2. Dscriptiv Statistics for sampl Firms Variabl N Minimum Maximum Man Std. Dviation Siz (in CHF millions) MARKET ,046 6,180 16,735 TOTAL ASSETS ,055 8,902 33,154 TOTAL SALES ,133 4,214 8,891 Risk BETA LEV Disclosur DPNTS Ex ant Cost of Capital ROE % 18.02% 8.02% 2.18% Tabl 3. Parson Corrlation Cofficints (two-taild) for Disclosur Scors and Firm Charactristics DPNTS DPNTS_1 DPNTS_2 DPNTS_3 MARKET RETURN CR_LIST LEV DPNTS_ (0.000) DPNTS_ (0.000) (0.000) DPNTS_ (0.000) (0.001) (0.000) MARKET (0.002) (0.048) (0.107) (0.000) RETURN (0.000) (0.000) (0.000) (0.000) (0.280) CR_LIST (0.117) (0.563) (0.170) (0.058) (0.000) (0.331) LEV (0.958) (0.674) (0.573) (0.928) (0.766) ( 0.631) (0.150) AUDIT (0.000) (0.000) (0.000) (0.124) (0.000) (0.718) (0.129) 94 ISSN X E-ISSN

13 Tabl 4. Rgrssion of absolut disclosur DISCL on firm spcific variabls MARKET, RETURN, CR_LIST, LEV and AUDIT DISCL i = α + β 1 ln(market i ) + β 2 RETURN i + β 3 CR_LIST i + β 4 LEV i + β 5 AUDIT i Intrcpt MARKET RETURN CR_LIST LEV AUDIT Adj. R 2 Cofficint % P-Valu (2-tail) (0.018) (0.117) (0.000) (0.806) (0.421) (0.000) (0.000) Tabl 5. Rgrssion of Ex ant Cost of Capital on Bta, Lvrag and Markt Valu ROE i = α + β 1 BETA i + β 2 LEV i + β 3 ln(market i ) + ε i Intrcpt BETA (+) LEV (+) MARKET (-) Adj. R 2 Panl A: Simpl Rgrssions (OLS) Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.000) Cofficint % P-Valu (2-tail) (0.000) (0.156) (0.156) Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.000) Panl B: Multipl Rgrssions (OLS) Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.000) (0.000) Cofficint % P-Valu (2-tail) (0.000) (0.048) (0.000) (0.000) Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.085) (0.000) (0.000) Tabl 6. Parson Corrlation Cofficints (2-tail) for x ant Cost of Capital and Firm Charactristics Variabl ROE BETA LEV DISCL BETA (0.000) LEV (0.156) (0.331) DISCL (0.000) (0.010) (0.976) MARKET (0.000) (0.625) (0.510) (0.211) Tabl 7. Rgrssion of Ex ant Cost of Capital on BETA, Lvrag, Disclosur Scor and Markt Valu ROE i = α + β 1 BETA i + β 2 LEV i + β 3 DISCL i + β 4 ln(market i ) + ε i Intrcpt BETA (+) LEV (+) DISCL (-) MARKET (-) Adj. R 2 Panl A: Simpl Rgrssions (OLS) Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.000) Panl B: Multipl Rgrssions (OLS) Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.000) (0.000) (0.000) Cofficint % P-Valu (2-tail) (0.000) (0.031) (0.000) (0.000) (0.000) Cofficint % P-Valu (2-tail) (0.000) (0.001) (0.052) (0.000) (0.000) (0.000) Publishd by Canadian Cntr of Scinc and Education 95

14 Tabl 8. Intraction Rgrssion: Firms with Aggrssiv Accounting Policy ROE i = α + β 1 BETA i + β 2 LEV i + β 3 D AGG i DISCL i + β 4 D AGG i + β 5 ln(market i ) + ε i Intrcpt BETA LEV D AGG DISCL D AGG ln(market) Adj. R 2 Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.074) (0.047) (0.379) (0.000) (0.000) Tabl 9. Intraction Rgrssion: Firms with Consrvativ Accounting Policy ROE i = α + β 1 BETA i + β 2 LEV i + β 3 D CONS i DISCL i + β 4 DISCL i + β 5 ln(market i ) + ε i Intrcpt BETA LEV D CONS DISCL DISCL ln(market) Adj. R 2 Cofficint % P-Valu (2-tail) (0.000) (0.000) (0.074) (0.785) (0.000) (0.000) (0.000) APPENDIX Summary of th Componnts of Disclosur Scor DPNTS Part 1: Background and ky non-financial Information (DPNTS_1) 1. Primary products 2. Primary markts and markt shars 3. Businss nvironmnt and crucial succss factors 4. Corporat govrnanc and organizational structur 5. Clint satisfaction 6. Employ satisfaction 7. Invstmnt in human rsourcs and managmnt dvlopmnt 8. Invstmnt in rsarch and dvlopmnt and othr intangibl assts 9. Product lif cycl and innovation 10. Oprational fficincy Part 2: Trnd analysis and managmnt discussion (DPNTS_2) 1. Trnd in sals ovr th last fiv yars 2. Dtaild sals information by rgion and businss sgmnt 3. Trnd in opration incom ovr th last fiv yars 4. Dtaild information about th oprating incom by rgion and sgmnt 5. Capital xpnditurs trnd ovr th last fiv yars 6. Capital xpnditurs by rgion and businss sgmnt 7. Trnd in stock prics and total sharholdrs rturn 8. Qualitativ discussion in sals and markt shars 9. Qualitativ discussion in oprating incom 10. Discussion of changs in capital xpnditurs / rsarch and dvlopmnt Part 3: Risk, valu-basd and forcastd information (DPNTS_3) 1. Qualitativ discussion of th risk managmnt tchniqu 2. Quantitativ risk xposur masurs 3. Implmntation of valu-basd managmnt 4. Qualitativ masurs of sharholdr valu cration 5. Managmnt compnsation 6. Profit forcast 7. Sals and growth forcasts 96 ISSN X E-ISSN