Post by schinderhannes on Oct 7, 2010 7:24:33 GMT 4
Capital Structure, Cost of Capital, and Voluntary Disclosures
Jeremy Bertomeu
Northwestern University - Kellogg School of Management
Anne Beyer
Stanford University - Graduate School of Business
Ronald A. Dye
Northwestern University - Department of Accounting Information & Management
June 8, 2010
Abstract:
This paper develops a model of external financing that jointly determines a firm's capital structure, its voluntary disclosure policy, and its cost of capital. We study a setting in which investors - who provide financing to a firm in exchange for securities issued by the firm - sometimes incur trading losses when they subsequently trade their securities with a superiorly informed trader. Both the firm's disclosure policy and the structure of the firm's securities determine the informational advantage of the superiorly informed trader, which in turn determines both the size of investors' trading losses and the firm's cost of capital.
In this setting, among other things, we establish a hierarchy of optimal securities and disclosure policies that varies with the volatility of the firm's cash flows. When all disclosures are voluntary, debt securities are always optimal, with the form of debt - whether risk-free, investment grade, or "junk" debt - varying with the firm's cash flow volatility. The model also predicts a negative association between firms' cost of capital and the extent of information the firms disclose voluntarily. This negative association does not imply, however, that more expansive voluntary disclosure causes firms' cost of capital to decline. The paper also documents how imposing mandatory disclosure requirements can alter firms' voluntary disclosure decisions, their capital structure choices, and their cost of capital.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1675002_code118207.pdf?abstractid=1675002&mirid=2
Jeremy Bertomeu
Northwestern University - Kellogg School of Management
Anne Beyer
Stanford University - Graduate School of Business
Ronald A. Dye
Northwestern University - Department of Accounting Information & Management
June 8, 2010
Abstract:
This paper develops a model of external financing that jointly determines a firm's capital structure, its voluntary disclosure policy, and its cost of capital. We study a setting in which investors - who provide financing to a firm in exchange for securities issued by the firm - sometimes incur trading losses when they subsequently trade their securities with a superiorly informed trader. Both the firm's disclosure policy and the structure of the firm's securities determine the informational advantage of the superiorly informed trader, which in turn determines both the size of investors' trading losses and the firm's cost of capital.
In this setting, among other things, we establish a hierarchy of optimal securities and disclosure policies that varies with the volatility of the firm's cash flows. When all disclosures are voluntary, debt securities are always optimal, with the form of debt - whether risk-free, investment grade, or "junk" debt - varying with the firm's cash flow volatility. The model also predicts a negative association between firms' cost of capital and the extent of information the firms disclose voluntarily. This negative association does not imply, however, that more expansive voluntary disclosure causes firms' cost of capital to decline. The paper also documents how imposing mandatory disclosure requirements can alter firms' voluntary disclosure decisions, their capital structure choices, and their cost of capital.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1675002_code118207.pdf?abstractid=1675002&mirid=2