The Effect of Disclosure Level on the Cost of Equitycapital

Posted: 15 Sep 1995

See all articles by Christine Botosan

Christine Botosan

Financial Accounting Standards Board


A lower cost of equity capital is believed by some to be a benefit of greater voluntary disclosure. I examine this association by regressing cost of capital on beta firm size and a self-constructed disclosure index based on the level of voluntary disclosure provided by 122 manufacturing firms in their 1990 annual reports. The results suggest that for lightly followed firms greater voluntary disclosure reduces cost of equity capital. No such association is found for heavily followed firms. I obtain firm-specific cost of equity capital estimates from an accounting based valuation formula. This approach incorporates forecast data thereby yielding an estimate of expected cost of equity capital and avoiding the noise arising from ex-post deviations from expected value. The association between the cost of equity capital estimates thus obtained and market beta is positive; its correlation with market value is negative. An examination of the internal consistency of the disclosure index and its association with firm characteristics identified in prior research to be correlated with annual report disclosure level provide support for the claim that the index is a valid and reliable measure of disclosure level.

JEL Classification: M41, G12, G14

Suggested Citation

Botosan, Christine, The Effect of Disclosure Level on the Cost of Equitycapital. Available at SSRN:

Christine Botosan (Contact Author)

Financial Accounting Standards Board ( email )

401 Merritt 7
PO Box 5116
Norwalk, CT 06856
United States

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