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A Tale of Beauties and Beasts: Testing the Optimal Disclosure Hypothesis

Jankensgård, Håkan LU (2014) In Multinational Finance Journal 18(1/2). p.139-167
Abstract
According to the cost-of-capital hypothesis, increased voluntary disclosure should reduce information asymmetries, lower the cost of capital, and increase firm value. The optimal-disclosure hypothesis, however, predicts that costs related to voluntary disclosure lead to the existence of an interior optimum of disclosure that maximizes firm value. These hypotheses are empirically tested using a previously unexplored database that covers disclosure rankings for listed Swedish firms between 2007 and 2012 (rendering around 1000 firm-years). The evidence is consistent with the optimal-disclosure hypothesis. I find a robust quadratic relationship between Tobin’s Q and the level of disclosure in annual reports. I find no significant relationship,... (More)
According to the cost-of-capital hypothesis, increased voluntary disclosure should reduce information asymmetries, lower the cost of capital, and increase firm value. The optimal-disclosure hypothesis, however, predicts that costs related to voluntary disclosure lead to the existence of an interior optimum of disclosure that maximizes firm value. These hypotheses are empirically tested using a previously unexplored database that covers disclosure rankings for listed Swedish firms between 2007 and 2012 (rendering around 1000 firm-years). The evidence is consistent with the optimal-disclosure hypothesis. I find a robust quadratic relationship between Tobin’s Q and the level of disclosure in annual reports. I find no significant relationship, however, between Tobin’s Q and disclosure in quarterly reports or web-based reporting. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
voluntary disclosure, cost of capital, Tobin’s Q, optimal disclosure
in
Multinational Finance Journal
volume
18
issue
1/2
pages
29 pages
ISSN
1096-1879
language
English
LU publication?
yes
id
d61cb0e7-d4b8-4109-9216-872bcb29cdcc
date added to LUP
2016-11-10 10:15:11
date last changed
2016-11-14 14:45:46
@article{d61cb0e7-d4b8-4109-9216-872bcb29cdcc,
  abstract     = {According to the cost-of-capital hypothesis, increased voluntary disclosure should reduce information asymmetries, lower the cost of capital, and increase firm value. The optimal-disclosure hypothesis, however, predicts that costs related to voluntary disclosure lead to the existence of an interior optimum of disclosure that maximizes firm value. These hypotheses are empirically tested using a previously unexplored database that covers disclosure rankings for listed Swedish firms between 2007 and 2012 (rendering around 1000 firm-years). The evidence is consistent with the optimal-disclosure hypothesis. I find a robust quadratic relationship between Tobin’s Q and the level of disclosure in annual reports. I find no significant relationship, however, between Tobin’s Q and disclosure in quarterly reports or web-based reporting.},
  author       = {Jankensgård, Håkan},
  issn         = {1096-1879},
  keyword      = {voluntary disclosure,cost of capital,Tobin’s Q,optimal disclosure},
  language     = {eng},
  number       = {1/2},
  pages        = {139--167},
  series       = {Multinational Finance Journal},
  title        = {A Tale of Beauties and Beasts: Testing the Optimal Disclosure Hypothesis},
  volume       = {18},
  year         = {2014},
}