Disclosure, Materiality Thresholds, and the Cost of Capital: Evidence from FOMC Announcements

Abstract

We investigate the effect of shocks to firms’ cost of capital on firms’ disclosure decisions. Specifically, we examine the extent to which firms issue Form 8-Ks and/or press releases following unexpected changes to the Fed funds rate. We find consistent evidence that unexpected decreases in the cost of capital lead to larger increases in disclosure by firms that are more sensitive to shocks to their cost of capital. Furthermore, the disclosure response to cost-of-capital surprises appears concentrated in Form 8-K items that require a materiality-based decision. Extended tests show that our results are not attributable to changes in the cost of capital leading to increased disclosure because firms are raising capital or hyping their stock. Overall, these results are consistent with concerns raised in recent research papers that changes in cost of capital influence firms’ materiality thresholds, which can affect their decision to disclose.

Keywords: Disclosure, Materiality, Cost of Capital, Monetary Policy

JEL Classification: M41, M41, E52