Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shaped Relation

Vasiliki Athanasakou, Florian Eugster, Thomas Schleicher, Martin Walker*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

3 Citations (Scopus)

Abstract

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.
Original languageEnglish
Peer-reviewed scientific journalEuropean Accounting Review
Pages (from-to)27-54
ISSN0963-8180
DOIs
Publication statusPublished - 26.01.2020
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • clutter
  • disclosure optimum
  • learning effects
  • narratives

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