Voluntary Disclosure and the Cost of Equity Capital: Evidence from Management Earnings Forecasts

Joung W. Kim; Yaqi Shi

Voluntary Disclosure and the Cost of Equity Capital: Evidence from Management Earnings Forecasts

Joung W. Kim
, Yaqi Shi

Research output: Contribution to journal › Article › peer-review

Abstract

This paper examines the directional effects of management earnings forecasts on the cost of equity capital. We find that forecasters of bad news experience a significant increase in the cost of equity capital in the month after their disclosure. Conversely, the cost of equity capital for good news forecasters does not change significantly in the same period. We also indicate that the magnitude of changes in the cost of capital for good news forecasters is significantly lower than that for bad news forecasters and non-forecasters, which suggests that investors may view good news forecasts less credible. Finally, we show that the effect of the subsequent earnings announcement on the cost of equity capital is preempted by the management forecasts for bad news firms, and that the combined effects of the management earnings forecasts and the earnings announcement are not significant for both good news and bad news forecasters. Our paper contributes to the literature by adding evidence on directional effects of voluntary disclosures and on long-term economic consequences of management earnings forecasts.

Original language	American English
Pages (from-to)	348-366
Number of pages	19
Journal	Journal of Accounting and Public Policy
Volume	30
Issue number	4
State	Published - Jul 1 2011

Funding

We wish to thank Changling Chen, Gus De Franco, JeongBon Kim and participants at the American Accounting Association (AAA) 2006 Annual Conference, and the Canadian American Accounting Association (CAAA) 2006 Annual Conference for helpful comments and suggestions. Yaqi Shi acknowledges financial support from Richard Ivey School of Business, University of Western Ontario. All errors remain our own responsibilities.

Funders
Richard Ivey School of Business, University of Western Ontario

ASJC Scopus Subject Areas

Accounting
Sociology and Political Science

Disciplines

Business

Cite this

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title = "Voluntary Disclosure and the Cost of Equity Capital: Evidence from Management Earnings Forecasts",

abstract = " This paper examines the directional effects of management earnings forecasts on the cost of equity capital. We find that forecasters of bad news experience a significant increase in the cost of equity capital in the month after their disclosure. Conversely, the cost of equity capital for good news forecasters does not change significantly in the same period. We also indicate that the magnitude of changes in the cost of capital for good news forecasters is significantly lower than that for bad news forecasters and non-forecasters, which suggests that investors may view good news forecasts less credible. Finally, we show that the effect of the subsequent earnings announcement on the cost of equity capital is preempted by the management forecasts for bad news firms, and that the combined effects of the management earnings forecasts and the earnings announcement are not significant for both good news and bad news forecasters. Our paper contributes to the literature by adding evidence on directional effects of voluntary disclosures and on long-term economic consequences of management earnings forecasts.",

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AB - This paper examines the directional effects of management earnings forecasts on the cost of equity capital. We find that forecasters of bad news experience a significant increase in the cost of equity capital in the month after their disclosure. Conversely, the cost of equity capital for good news forecasters does not change significantly in the same period. We also indicate that the magnitude of changes in the cost of capital for good news forecasters is significantly lower than that for bad news forecasters and non-forecasters, which suggests that investors may view good news forecasts less credible. Finally, we show that the effect of the subsequent earnings announcement on the cost of equity capital is preempted by the management forecasts for bad news firms, and that the combined effects of the management earnings forecasts and the earnings announcement are not significant for both good news and bad news forecasters. Our paper contributes to the literature by adding evidence on directional effects of voluntary disclosures and on long-term economic consequences of management earnings forecasts.

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Voluntary Disclosure and the Cost of Equity Capital: Evidence from Management Earnings Forecasts

Abstract

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ASJC Scopus Subject Areas

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