A theoretical foundation is provided by Klein and Bawa , and Barry and Brown who suggest that higher disclosure reduces estimation risk which represents uncertainty regarding an asset’s return or payoff distribution. If this risk is non-diversifiable, investors will demand an incremental return for bearing the information risk.
Further analysis is provided by Easley and O’Hara , who analyze how private and public information affect the cost of capital. For firms with a low level of public information in relation to private information, investors require higher returns to offset uncertainty about asset returns. As a result, firms with high levels of disclosure, and hence low information risk and private information, are likely to have a lower cost of capital than firms with low disclosure levels and high information risk.
Botosan and Plumlee present empirical evidence that the cost of equity capital decreases with an increase in the transparency of annual reports.
In line with these results, Gray et al.
state that the primary goal of firms is to lower the cost of capital.
They do this by voluntarily disclosing information and thereby reducing ‘‘information risk’’ and investor uncertainty about the quality of the firm and the expected returns from its securities. Therefore, we expect positive abnormal returns on a short-term basis after the filing of the first XBRL report and a significantly lower level of cumulative abnormal returns long-term as a sign for lower cost of equity capital
Information Intermediation
The second hypothesis on information intermediation captures the positive effects on investors and analysts.
Existing research on corporate disclosure suggests a negative relationship of information disclosure and information asymmetry. A higher level of voluntary disclosure enables more analysts to access and aggregate information.
This increases the number of analysts following as pecific stock.
Bhushan argues that voluntary disclosure lowers the cost of
information acquisition for analysts and hence increases their supply.
Lang and Lundholm indicate increased investor following with a higher score of informativeness of a firm’s disclosure policy. Fang and Peress find that breadth of information dissemination has an influence on stock returns.
They discover a significant return premium on stocks with no media coverage which can also affect the cost of equity capital. Furthermore, voluntary disclosures also might help lesser known firms to make investors aware of their existence, as modeled
theoretically by Merton.
As indicated above, Interactive Data has several advantages for analysts and investors. It enables them to follow a specific stock
more easily and therefore attracts more analysts.