Abstract

AbstractThis paper investigates the relationship between annual report disclosure, market liquidity, and capital cost for firms registered on the Deutsche Börse. Disclosure is comprehensively measured using the innovative Artificial Intelligence Measurement of Disclosure (AIMD). Results show that annual report disclosure enhances market liquidity by changing investors’ expectations and inducing portfolio adjustments. Trading frictions are negatively associated with disclosure. The study provides evidence for a capital-cost-reduction effect of disclosure based on the analysis of investors’ return requirements and market values. Altogether, no evidence is found that the information processing at the German capital market is structurally different from other markets.

Highlights

  • The impact of corporate disclosure on capital markets has been discussed for decades–and the interest has not decreased over time. Lev and Ohlson (1982: 249) stated in their review of research in the field: “A decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here”

  • Corporate disclosure is discussed in the literature to have considerable capital market implications

  • In line with Healy and Palepu (2001) I examine market liquidity and capital cost implications of annual report disclosure for a sample of German firms listed on the Deutsche Börse

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Summary

Introduction

The impact of corporate disclosure on capital markets has been discussed for decades–and the interest has not decreased over time. Lev and Ohlson (1982: 249) stated in their review of research in the field: “A decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here”. Prior research mainly discussed the relation between disclosure and an increase in wealth of shareholders, and evaluated other market consequences of disclosure. Most prior studies investigated the implications of annual report disclosure on capital markets outside Germany or relied on specific, narrow proxies for disclosure with questionable validity (e.g., Leuz and Verrecchia 2000, Leuz 2003). Capital-market-related research mainly addresses voluntary disclosure as from a mandatory disclosure that does not vary between firms (of a certain industry, size and exchange segment) no firm-specific endogenous market reactions can be expected. BuR - Business Research Official Open Access Journal of VHB Verband der Hochschullehrer für Betriebswirtschaft e.V. 9ROXPH _ ,VVXH _ 0DUFK _ 82 and Sivaramakrishnan (2010), and Zechman (2010) I disregard mandatory disclosure implications but focus on firm-specific disclosure consequences.

Trading activity
Bid-Ask Spread
Equity Cost Hypothesis Development
Investors’ Return Requirements
Other direct measures for cost of capital
Market Value
Regression Models
Empirical Measures
Sample and Descriptive Results
DISCLOSURE FREEFLOAT p
Regression Results
Robustness Analysis
Conclusion
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