Modeling RBRT adoption and its effects on cost of capital

Abstract

In the capital market, firms compete to obtain capital at a lower cost than their rivals. In order to do so, firms may try to increase their information disclosure by adopting new information technologies, such as a real-time business reporting technology (RBRT). The financial accounting literature has empirically provided positive evidence of increased transparency (e.g., resulting from RBRT adoption). We attempt to link the transparency and cost of capital literatures and extend organizational innovation adoption theory. We adapt some constructs from existing innovation adoption theory, as well as contribute some that apply to a RBRT context, to develop a mathematical model on the relationship between RBRT adoption and the cost of capital. The model considers both micro-(firm) level factors and macro-level factors that affect the adoption decision. We argue that cost of capital savings, uncertainty, risk aversion, transaction and transformation costs, and governmental policy affect a firm's decision of whether and when to adopt a RBRT. A number of propositions are derived, based on our model, which may help firms formulate their adoption strategy. Our model also provides a basis for further empirical study on this new issue.