Empirical Study of the Relationship between Voluntary Disclosure and the Cost of Equity Capital

The relationship between disclosure level and cost of equity capital is an important topic in today's economy. In general, economic theories and anecdotal evidences suggest a negative relationship. Empirical work, however, is confronted with major methodological drawbacks - neither disclosure level nor cost of equity capital can be observed directly - and the relationship is not well established and has been difficult to quantify. In this paper, we examine the relationship between disclosure level and the cost of equity capital(r) by regressing firm-specific estimates of r on market beta, leverage, firm size and a self-constructed measure of voluntary disclosure. Our self-constructed measure consists of six categories. With a sample of 102 Chinese listed firms that disclose 2004 annual reports, strategy background information (STR), forecast information (FOR) and corporate governance (COR) are significantly negatively related to r, after controlling market beta, leverage and firm size. However, we find no evidence of a relationship between total measure of disclosure level and cost of equity capital