Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital
This paper examines whether and how inside ownership mediates the relation between disclosure quality and the cost of capital. Both ownership and more transparent reporting have the potential to align incentives between managers and investors thereby reducing systematic risk. Employing a large globa...
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| Format: | Article |
| Language: | en_US |
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Taylor & Francis
2015
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| Online Access: | http://hdl.handle.net/1721.1/98538 https://orcid.org/0000-0001-9424-3406 https://orcid.org/0000-0003-1231-7374 |
| _version_ | 1811091554546221056 |
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| author | Core, John E. Hail, Luzi Verdi, Rodrigo |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Core, John E. Hail, Luzi Verdi, Rodrigo |
| author_sort | Core, John E. |
| collection | MIT |
| description | This paper examines whether and how inside ownership mediates the relation between disclosure quality and the cost of capital. Both ownership and more transparent reporting have the potential to align incentives between managers and investors thereby reducing systematic risk. Employing a large global sample across 35 countries over the 1990–2004 period, we show that country-level disclosure regulation is negatively related to (i) inside ownership, and (ii) firms' implied cost of capital and realised returns. We then introduce ownership into the cost of capital model, and also find a negative relation. These relations extend to the systematic component of the cost of capital, estimated from Fama–French portfolio sorts on ownership and disclosure regulation. Thus, while the direct effect of disclosure on cost of capital is negative, the indirect effect via ownership is positive, consistent with disclosure quality and ownership acting as substitutes. Using path analysis to assess the relative magnitude, our estimates suggest that the direct effect of disclosure quality outweighs the indirect effect by a ratio of about five to one. |
| first_indexed | 2024-09-23T15:04:13Z |
| format | Article |
| id | mit-1721.1/98538 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T15:04:13Z |
| publishDate | 2015 |
| publisher | Taylor & Francis |
| record_format | dspace |
| spelling | mit-1721.1/985382022-10-02T00:22:21Z Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital Core, John E. Hail, Luzi Verdi, Rodrigo Sloan School of Management Core, John E. Verdi, Rodrigo This paper examines whether and how inside ownership mediates the relation between disclosure quality and the cost of capital. Both ownership and more transparent reporting have the potential to align incentives between managers and investors thereby reducing systematic risk. Employing a large global sample across 35 countries over the 1990–2004 period, we show that country-level disclosure regulation is negatively related to (i) inside ownership, and (ii) firms' implied cost of capital and realised returns. We then introduce ownership into the cost of capital model, and also find a negative relation. These relations extend to the systematic component of the cost of capital, estimated from Fama–French portfolio sorts on ownership and disclosure regulation. Thus, while the direct effect of disclosure on cost of capital is negative, the indirect effect via ownership is positive, consistent with disclosure quality and ownership acting as substitutes. Using path analysis to assess the relative magnitude, our estimates suggest that the direct effect of disclosure quality outweighs the indirect effect by a ratio of about five to one. Wharton School Sloan School of Management 2015-09-17T17:22:08Z 2015-09-17T17:22:08Z 2014-12 2014-05 Article http://purl.org/eprint/type/JournalArticle 0963-8180 1468-4497 http://hdl.handle.net/1721.1/98538 Core, John E., Luzi Hail, and Rodrigo S. Verdi. “Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital.” European Accounting Review 24, no. 1 (January 2, 2015): 1–29. https://orcid.org/0000-0001-9424-3406 https://orcid.org/0000-0003-1231-7374 en_US http://dx.doi.org/10.1080/09638180.2014.985691 European Accounting Review Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Taylor & Francis SSRN |
| spellingShingle | Core, John E. Hail, Luzi Verdi, Rodrigo Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital |
| title | Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital |
| title_full | Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital |
| title_fullStr | Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital |
| title_full_unstemmed | Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital |
| title_short | Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital |
| title_sort | mandatory disclosure quality inside ownership and cost of capital |
| url | http://hdl.handle.net/1721.1/98538 https://orcid.org/0000-0001-9424-3406 https://orcid.org/0000-0003-1231-7374 |
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