Voluntary Disclosure, Earnings Quality, and Cost of Capital

2008/01/02 by Jennifer Francis, JENNIFER FRANCIS, DHANANJAY NANDA +3 · 1,108 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Auditing, Earnings Management, Governance #Business #Capital (architecture) #Corporate Finance and Governance #Cost of capital #Earnings #Earnings quality #Economics #Financial Markets and Investment Strategies #Implicit cost #Index (typography) #Microeconomics #Profit (economics) #Proxy (statistics) #Quality (philosophy) #Total cost #Turnover #Voluntary disclosure

paper · doi:10.1111/j.1475-679x.2008.00267.x

published in Journal of Accounting Research 46(1), 53-99 (Wiley)

openalex publication_date 2008/01/02 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/27

Abstract

ABSTRACT 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.

Citations

• Corporate Disclosure Policy and Analyst Behavior.
• Disclosure level and the cost of equity capital.
• Earnings Management During Import Relief Investigations
• Costs of Equity and Earnings Attributes
• Assessing Alternative Proxies for the Expected Risk Premium
• Capital Market Equilibrium with Restricted Borrowing
• An Evaluation of Accounting-Based Measures of Expected Returns
• Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
• The Economic Consequences of Increased Disclosure
• On the Association between Voluntary Disclosure and Earnings Management
• The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
• PE Ratios, PEG Ratios, and Estimating the Implied Expected Rate of Return on Equity Capital
• Managerial Decisions and Long‐Term Stock Price Performance
• Accounting Information, Disclosure, and the Cost of Capital

Cited by

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• Too Good to Be True: Firm Social Performance and the Risk of Data Breach
• Understanding earnings quality: A review of the proxies, their determinants and their consequences
• The financial reporting environment: Review of the recent literature
• Shareholder Protection and the Cost of Capital
• Customer concentration risk and the cost of equity capital
• Expected loss recognition and banks’ management forecasts
• Environmental Risk and Credit Ratings, and the Moderating Effect of Market Competition. [europepmc]
• The Influence of COVID-19 Pandemic on Management Earnings Forecasts. [europepmc]

Related

• Disclosure level and the cost of equity capital.
• Accounting Information, Disclosure, and the Cost of Capital
• Costs of Equity and Earnings Attributes
• Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting
• On the Association between Voluntary Disclosure and Earnings Management