Disclosure, Materiality Thresholds, and the Cost of Capital: Evidence from Federal Open Market Committee Announcements

Abstract

We examine how managers’ disclosure decisions vary in response to monetary policy shocks. Specifically, we examine the extent to which firms issue Forms 8-K, press releases, and management forecasts following unexpected changes to the target federal funds rate. We find consistent evidence that unexpected decreases (increases) in the Federal Open Market Committee target rate lead to larger increases (decreases) in disclosure by firms that are more sensitive to monetary policy shocks. Furthermore, the disclosure response to target rate surprises is concentrated in Form 8-K items that require a materiality-based decision and hold when we examine a sample of M&A-participating firms. Extended tests show that our results are not attributable to changes in the cost of capital leading to increased disclosure because firms are simultaneously raising capital or hyping their stock. Overall, our results are consistent with arguments raised in recent research papers that changes in cost of capital influence firms’ materiality thresholds, which can affect their decision to disclose. This paper was accepted by Suraj Srinivasan, accounting. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01896 .