In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the firm's assessed covariances with other firms' cash flows, which is nondiversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital.

/pdf/accounting-information-disclosure-and-the-cost-of-capital-3m71gloosp.pdf

Accounting Information, Disclosure, and the Cost of Capital

In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed covariances with other firms' cash flows, which is non-diversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline the cost of capital.

/pdf/accounting-information-disclosure-and-the-cost-of-capital-2vvq9xorh0.pdf

This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research.

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms‟ reporting and disclosure activities and then use this framework to discuss potential costs and benefits of regulating these activities and to organize the key insights from the literature. Our survey highlights important unanswered questions and concludes with numerous suggestions for future research.

Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for Future Research

Assessing the value of information technology (IT) security is challenging because of the difficulty of measuring the cost of security breaches. An event-study analysis, using market valuations, was used to assess the impact of security breaches on the market value of breached firms. The information-transfer effect of security breaches (i.e., their effect on the market value of firms that develop security technology) was also studied. The results show that announcing an Internet security breach is negatively associated with the market value of the announcing firm. The breached firms in the sample lost, on average, 2.1 percent of their market value within two days of the announcement--an average loss in market capitalization of $1.65 billion per breach. Firm type, firm size, and the year the breach occurred help explain the cross-sectional variations in abnormal returns produced by security breaches. The effects of security breaches are not restricted to the breached firms. The market value of security developers is positively associated with the disclosure of security breaches by other firms. The security developers in the sample realized an average abnormal return of 1.36 percent during the two-day period after the announcement--an average gain of $1.06 billion in two days. The study suggests that the cost of poor security is very high for investors. rity, information technology security management, Internet security, security breach an-

/pdf/the-effect-of-internet-security-breach-announcements-on-5epbhuq31e.pdf

The Effect of Internet Security Breach Announcements on Market Value: Capital Market Reactions for Breached Firms and Internet Security Developers

Managers' earnings forecasts and intra-industry information transfers

This paper provides evidence on the association between unexpected quarterly earnings information and the contemporaneous stock price behavior of announcing and nonannouncing firms in the same industry. Prior research provides evidence consistent with a positive sign and magnitude relation between the unsystematic stock returns of announcing and nonannouncing firms at earnings release dates, i.e., information transfers (Foster [1981] and Clinch and Sinclair [1987]). As these studies emphasize, however, such an association may arise from misspecification of the stock-return-generating process. To address this issue, we use unexpected earnings, not announcing firms' unsystematic stock returns, in tests of information transfers. Evidence consistent with information transfers when unexpected earnings are used as a proxy for the informativeness of earnings would reduce the likelihood of information transfers attributable to returns model misspecification, and would support the hypothesis that unexpected earnings, and not some unspecified information item, drive information transfers at earnings release dates. We find a positive sign and magnitude relation between the contemporaneous unsystematic stock returns of announcing and nonannouncing firms at earnings release dates and between unexpected earnings of announcing firms and unsystematic stock returns of nonannouncing

Unexpected Earnings and Intraindustry Information Transfers: Further Evidence

This study examines earnings timeliness and its effect on earnings information transfers. Empirical analyses focus on a sample of approximately fifteen hundred earnings reports and nearly four thousand information transfers. The principal findings are: (1) earlier earnings releases yield negative information transfers, (2) earnings releases yield negative (nominal) information transfers to firms that previously (subsequently) release their earnings reports, and (3) earlier earnings releases yield negative information transfers to firms that have not yet disclosed earnings. These findings show that the timing of earnings reports has significant and far-reaching economic consequences.

Timeliness of Reporting and Earnings Information Transfers

Managers' earnings forecasts are associated with statistically significant stock price reactions. While nearly half of all earnings forecasts are released with revenue forecasts, the motivation for and the effects associated with revenue forecasts are unknown. This paper proposes and tests hypotheses involving the stock price informativeness of both earnings and revenue forecasts. The "expectations adjustment" hypothesis advanced by Ajinkya and Gift [1984], and generalized by King, Pownall, and Waymire [1990], predicts that managers release forecasts to align equilibrium prices of common stocks with those of managers. Under this view, both earnings and revenue forecasts are mechanisms by which managers adjust expectations. Since releasing forecasts entails costs, revenue forecasts will accompany earnings forecasts when the latter are insufficient to adjust stock prices consistent with managers' expectations. This yields our paper's primary hypotheses: (1) earnings forecasts released without revenue forecasts are more price informative, and (2) revenue forecasts are price informative. Since the magnitude and opportunities for trading gains from foreknowledge of information is greater for large firms, we

Stock Price Behavior Associated with Managers' Earnings and Revenue Forecasts

I. OVERVIEW OF INTERNATIONAL BUSINESS1. The Global PerspectiveII. NATIONAL BUSINESS ENVIRONMENTS2. Culture in Business3. Politics and Law in Business4. Business in Other EconomiesIII. INTERNATIONAL TRADE AND INVESTMENT5. International Trade6. Government Impact on International Trade7. Foreign Direct Investment8. Regional Economic IntegrationIV. INTERNATIONAL FINANCIAL SYSTEM9. International Financial Markets10. International Monetary SystemV. INTERNATIONAL BUSINESS MANAGEMENT11. Analyzing International Opportunities12. Planning and Organizing International Operations13. Selecting and Managing Entry Modes14. Acquiring Business Resources15. Managing the International Business

Jerry C. Y. Han

Papers

Managers' earnings forecasts and intra-industry information transfers

Unexpected Earnings and Intraindustry Information Transfers: Further Evidence

Timeliness of Reporting and Earnings Information Transfers

Stock Price Behavior Associated with Managers' Earnings and Revenue Forecasts

International business : an integrated approach