Disclosure and the Cost of Equity Capital: An Analysis at the Market Level

This study examines whether disclosure reduces the market cost of capital. A stock's implied cost of capital is defined as the expected return that equates its current price to the present value of its expected future free cash flows. We compute implied costs of capital for each firm and use their average as a measure of the market cost of capital. Using a sample of management forecasts issued between 1994 and 2010, we find that an increase in disclosure at the aggregate level results in a lower market cost of capital. This result is robust to alternative measures of disclosure and implied cost of capital, and controls for size, book-to-market, momentum, and other determinants of cost of capital. Overall, our findings are consistent with disclosure increasing overall information precision, resulting in a decrease in the cost of capital at the market level.