Accounting Information, Disclosure, and the Cost of Capital

2007/03/16 by RICHARD LAMBERT, Richard A. Lambert, CHRISTIAN LEUZ +3 · 2,450 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Accounting information system #Asset (computer security) #Auditing, Earnings Management, Governance #Business #Cash flow #Cash flow statement #Computer science #Cost of capital #Diversification (marketing strategy) #Econometrics #Economics #Financial Markets and Investment Strategies #Financial Reporting and Valuation Research #Financial economics #Marketing #Microeconomics #Monetary economics #Operating cash flow #Quality (philosophy)

paper · doi:10.1111/j.1475-679x.2007.00238.x

published in Journal of Accounting Research 45(2), 385-420 (Wiley)

openalex publication_date 2007/03/16 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

Abstract

ABSTRACT In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the firm's assessed covariances with other firms' cash flows, which is nondiversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital.

Citations

• Disclosure level and the cost of equity capital.
• Costs of Equity and Earnings Attributes
• International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?
• Liquidity Risk and Expected Stock Returns
• The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices

Cited by

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• On the use of instrumental variables in accounting research
• Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions
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• The Effect of Information on Uncertainty and the Cost of Capital
• Flight to Quality in International Markets: Investors’ Demand for Financial Reporting Quality during Political Uncertainty Events
• Mandatory CSR and sustainability reporting: economic analysis and literature review
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• Understanding earnings quality: A review of the proxies, their determinants and their consequences
• The financial reporting environment: Review of the recent literature
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• The Relationship between Environmental Information Disclosure and Profitability: A Comparison between Different Disclosure Styles. [europepmc]
• Quantity, Quality, and Performance of Corporate Social Responsibility Information Disclosure by Listed Enterprises in China: A Regional Perspective. [europepmc]
• Analysis of Equity Disputes in Listed Companies With Dispersed Ownership Structure and Protection of Small and Medium Shareholders' Interests. [europepmc]
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• Environmental, social, and governance performance, financing constraints, and corporate investment efficiency: Empirical evidence from China. [europepmc]
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• Firm performance and cost of equity capital: the moderating role of narrative risk disclosure quality in Egypt [europepmc]

Related

• Disclosure level and the cost of equity capital.
• The Effect of Information on Uncertainty and the Cost of Capital
• Voluntary Disclosure, Earnings Quality, and Cost of Capital
• Accounting Quality and Firm-Level Capital Investment
• Costs of Equity and Earnings Attributes