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

58 Pages Posted: 27 Feb 2021 Last revised: 9 Jun 2021

See all articles by Michael Dambra

Michael Dambra

SUNY at Buffalo - School of Management

Mihail Velikov

Pennsylvania State University

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: December 30, 2020

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

Suggested Citation

Dambra, Michael and Velikov, Mihail and Weber, Joseph Peter, Disclosure, Materiality Thresholds, and the Cost of Capital: Evidence from FOMC Announcements (December 30, 2020). Available at SSRN: https://ssrn.com/abstract=3757513 or http://dx.doi.org/10.2139/ssrn.3757513

Michael Dambra (Contact Author)

SUNY at Buffalo - School of Management ( email )

350 Jacobs Management Center
Buffalo, NY 14260-1660
United States
716-645-3237 (Phone)

Mihail Velikov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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