TY - JOUR
T1 - Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shaped Relation
AU - Athanasakou, Vasiliki
AU - Eugster, Florian
AU - Schleicher, Thomas
AU - Walker, Martin
N1 - Funding Information:
Florian Eugster gratefully acknowledges the support of Handelsbanken Wallander stipendium. The authors thank Mahmoud El-Haj, Paul Rayson, and Steven Young, for their work on developing the CFIE annual report narratives database; and Mattias Hamberg (discussant) and the participants of the Accounting Research Seminar at Stockholm School of Economics, the University of Bradford, the 2016 Nordic Accounting Conference, and the 2017 EAA Congress in Valencia, for helpful comments on earlier versions of the paper. We thank the anonymous reviewer and the special issue editors, Reuven Lehavy and Florin Vasvari, for very helpful comments. All remaining errors are the responsibility of the authors.
Publisher Copyright:
© 2020, © 2020 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
PY - 2020/1/26
Y1 - 2020/1/26
N2 - We hypothesize and test for a U-shaped relation between the cost of equity capital and the level of disclosure in annual report narratives. Using a computer-generated word-count-based index of the level of disclosure in U.K. annual report narratives, we document a negative relation with the cost of equity capital at low levels of disclosure, and a positive relation at higher levels of disclosure, together implying the presence of an optimal level of disclosure. We interpret the positive relation at higher levels of disclosure as evidence of uninformative clutter increasing the cost of equity capital. Additional analyses indicate the presence of both firm-level learning and regulatory corporate reporting initiatives as factors shaping adjustments towards optimum levels of disclosure.
AB - We hypothesize and test for a U-shaped relation between the cost of equity capital and the level of disclosure in annual report narratives. Using a computer-generated word-count-based index of the level of disclosure in U.K. annual report narratives, we document a negative relation with the cost of equity capital at low levels of disclosure, and a positive relation at higher levels of disclosure, together implying the presence of an optimal level of disclosure. We interpret the positive relation at higher levels of disclosure as evidence of uninformative clutter increasing the cost of equity capital. Additional analyses indicate the presence of both firm-level learning and regulatory corporate reporting initiatives as factors shaping adjustments towards optimum levels of disclosure.
KW - 512 Business and Management
KW - clutter
KW - disclosure optimum
KW - learning effects
KW - narratives
UR - http://www.scopus.com/inward/record.url?scp=85078415201&partnerID=8YFLogxK
UR - https://www.mendeley.com/catalogue/e9d1c94e-2b31-3f65-a83e-bcde09e08520/
U2 - 10.1080/09638180.2019.1707102
DO - 10.1080/09638180.2019.1707102
M3 - Article
VL - 29
SP - 27
EP - 54
JO - European Accounting Review
JF - European Accounting Review
SN - 0963-8180
IS - 1
ER -