Annual report narratives and the cost of equity capital: UK evidence of a u-shaped relation

Research output: Contribution to journalArticlepeer-review

Abstract

We hypothesise 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.

Bibliographical metadata

Original languageEnglish
JournalEuropean Accounting Review
Early online date26 Jan 2020
DOIs
Publication statusE-pub ahead of print - 26 Jan 2020

Related information

Researchers

View all