Reduction In Cost Of Capital Research Articles

Firm Competitiveness: An Examination of the Role of Corporate Governance in Defining Cost of Capital

This paper discusses the influence of Corporate Governance (CG) on Cost of Capital (CoC). The study revolves on the hypothesis that optimum capital structure at minimum cost is also an agenda item of CG. Thus this study explores the influence of CG on overall cost of capital as well as at its components level. The main goal is to prove that with improvement in CG performance, leads to reduction in information asymmetry among principal and agents, enabling agency cost to decline resulting in resetting guidance for required returns for equity and debt to a lower level. Main attention was paid to nature of correlation and OLS based econometric modelling of WACC to identify the lead indicators CG should influence to create an impact. This topic was chosen on the assumption that CG has a role to play in enabling financial competitiveness for the firm to fuel its ambitious growth path. The major findings of the paper are, there exist no statistically significant differences existing among the means for CoC among the CG categories, and with rise in CG, and required return on equity and required return on debt are declining by the direction of correlation. However, in CGPI category 1, study finds required return on debt rising as a possible outcome of corporate strategies in those companies. The above findings suggest that the implications on the CoC on the whole is an outcome of the strategy implementation which is a byproduct of CG performance. Overall, study concludes that there is a reduction in CoC with rise in CG performance.

Does voluntary adoption of XBRL reduce cost of equity capital?

Purpose – The paper aims to examine whether or not firms voluntarily filing in XBRL (eXtensible Business Reporting Language) format enjoy a lower cost of capital. XBRL, or “interactive data” as the US Securities and Exchange Commission refers to it, is an information format that enables electronic exchange of standardized business and financial information. Design/methodology/approach – The authors investigate whether voluntary adoption of XBRL impacts cost of equity capital using a sample of US firms participated in the SEC Voluntary Filer Program, each matched with a pair of non-XBRL filers (matched by two-digit SIC code, same fiscal yearend, and close total assets in the same year). The authors measure firm-specific cost of equity capital at the fiscal year of last voluntary XBRL filing, using the PEG ratio model proposed by Easton, Gode and Mohanram, and Hou et al. Findings – The results show that cost of equity capital is significantly and negatively associated with XBRL adoption. The magnitude of the coefficient on XBRL suggests that firms voluntarily adopting XBRL are associated with an average reduction in cost of equity capital by 17-20 basis points (conditional on different cost of capital measures). Research limitations/implications – There is a research limitation due to the sample of voluntary XBRL adopters as of self-selection bias. The authors address this issue by using the Heckman two-stage regression procedure. Practical implications – The study provides evidence on the economic consequence of XBRL adoption in that it benefits shareholders by reducing the cost of equity capital. The evidence should provide regulators like the SEC more incentives to mandate the XBRL standard and motivate companies to adopt the standard as well. Originality/value – By showing that voluntary XBRL adopters are associated with lower cost of equity capital, the study provides timely and relevant empirical evidence to the economic consequences of voluntary adoption of XBRL. It also contributes to the limited empirical research on the economic consequences of new information technology and highlights the importance of institutional regulation in shaping the outcomes of new financial reporting format.

Information and the Cost of Capital: An Ex-Ante Perspective

The relationship between the informational environment and the cost of equity capital has received considerable interest in finance and accounting research as well as in financial reporting regulation. Recent papers have demonstrated that increased public disclosure may decrease firms' cost of capital, at least if the additional information pertains to systematic risk. The discussion has focused on the impact of information on the cost of capital subsequent to the release of the information (the ex-post cost of capital). We show that the reduction in the ex-post cost of capital is offset by an equal increase in the cost of capital for the period leading up to the release of the information (the preposterior cost of capital). Thus, within the class of models framing the recent discussion, there is no impact on the ex-ante cost of capital covering the full time span of the firm. The extent to which information is made publicly or privately available affects the timing of the resolution of uncertainty and when the information is reflected in equilibrium prices, but there is no impact on initial equilibrium prices.In efficient economies with only public information, there is no impact of the information system choice on the investors' ex-ante expected utilities either. In the partially revealing rational expectations equilibrium of an economy with private investor information, however, the rational investors may actually benefit from a higher ex-post cost of capital (at the expense of the liquidity traders).

Disclosure level and cost of equity capital: evidence from the banking industry

AbstractThe impact of voluntary disclosures on cost of equity capital is of significant interest to investors and managers. Using a disclosure scoring model this association is examined for 135 banks from Europe, North America and Australia. After controlling for the cross‐sectional variation in beta, firm size, price to book value and price to earnings ratios, the study found that higher disclosure levels are associated with a reduction in cost of equity capital. Disclosures about risk management practices seem to most influence the reduction in the cost of equity capital. European banks show greater reduction in the cost of equity capital from improved disclosures compared to their non‐European counterparts. Copyright © 2005 John Wiley & Sons, Ltd.