IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v54y2012i2p132-149.html
   My bibliography  Save this article

Financial reporting frequency, information asymmetry, and the cost of equity

Author

Listed:
  • Fu, Renhui
  • Kraft, Arthur
  • Zhang, Huai

Abstract

Using hand-collected data on firms’ interim reporting frequency from 1951 to 1973, we examine the impact of financial reporting frequency on information asymmetry and the cost of equity. Our results show that higher reporting frequency reduces information asymmetry and the cost of equity, and they are robust towards considerations of the endogenous nature of firms’ reporting frequency choice. We obtain similar results when we focus on mandatory changes in reporting frequency. Our results suggest the benefits of increased reporting frequency.

Suggested Citation

  • Fu, Renhui & Kraft, Arthur & Zhang, Huai, 2012. "Financial reporting frequency, information asymmetry, and the cost of equity," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 132-149.
    • Handle: RePEc:eee:jaecon:v:54:y:2012:i:2:p:132-149
    DOI: 10.1016/j.jacceco.2012.07.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410112000560
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2012.07.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Handa, Puneet & Linn, Scott C., 1993. "Arbitrage Pricing with Estimation Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 81-100, March.
    2. Tuomo Vuolteenaho, 2002. "What Drives Firm‐Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    3. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    4. Heitzman, Shane & Wasley, Charles & Zimmerman, Jerold, 2010. "The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 109-132, February.
    5. repec:bla:jfinan:v:43:y:1988:i:4:p:1041-48 is not listed on IDEAS
    6. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 91-124.
    7. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    8. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    9. Gigler, F & Hemmer, T, 1998. "On the frequency, quality, and informational role of mandatory financial reports," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 117-147.
    10. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    11. William R. Gebhardt & Charles M. C. Lee & Bhaskaran Swaminathan, 2001. "Toward an Implied Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 135-176, June.
    12. McNichols, Maureen & Trueman, Brett, 1994. "Public disclosure, private information collection, and short-term trading," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 69-94, January.
    13. Christopher S. Armstrong & John E. Core & Daniel J. Taylor & Robert E. Verrecchia, 2011. "When Does Information Asymmetry Affect the Cost of Capital?," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 1-40, March.
    14. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    15. repec:aei:rpbook:24120 is not listed on IDEAS
    16. Stoll, Hans R, 1978. "The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks," Journal of Finance, American Finance Association, vol. 33(4), pages 1153-1172, September.
    17. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    18. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, May.
    19. Bhushan, Ravi, 1989. "Collection of information about publicly traded firms : Theory and evidence," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 183-206, July.
    20. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    21. Christine A. Botosan & Marlene A. Plumlee, 2002. "A Re‐examination of Disclosure Level and the Expected Cost of Equity Capital," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 21-40, March.
    22. Leuz, Christian & Triantis, Alexander & Yue Wang, Tracy, 2008. "Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 181-208, August.
    23. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    24. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    25. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    26. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    27. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
    28. Leftwich, Rw & Watts, Rl & Zimmerman, Jl, 1981. "Voluntary Corporate Disclosure - The Case Of Interim Reporting," Journal of Accounting Research, Wiley Blackwell, vol. 19, pages 50-77.
    29. Larcker, David F. & Rusticus, Tjomme O., 2010. "On the use of instrumental variables in accounting research," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 186-205, April.
    30. Jennifer Francis & Dhananjay Nanda & Per Olsson, 2008. "Voluntary Disclosure, Earnings Quality, and Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 53-99, March.
    31. Andrew Buskirk, 2012. "Disclosure frequency and information asymmetry," Review of Quantitative Finance and Accounting, Springer, vol. 38(4), pages 411-440, May.
    32. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    33. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    34. Bushman, Rm, 1991. "Public Disclosure And The Structure Of Private Information Markets," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 261-276.
    35. Holger Daske & Luzi Hail & Christian Leuz & Rodrigo Verdi, 2008. "Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 1085-1142, December.
    36. Bhushan, Ravi, 1989. "Firm characteristics and analyst following," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 255-274, July.
    37. Silber, William L., 2005. "What happened to liquidity when world war I shut the NYSE?," Journal of Financial Economics, Elsevier, vol. 78(3), pages 685-701, December.
    38. Guochang Zhang, 2001. "Private Information Production, Public Disclosure, and the Cost of Capital: Theory and Implications," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 363-384, June.
    39. Butler, Marty & Kraft, Arthur & Weiss, Ira S., 2007. "The effect of reporting frequency on the timeliness of earnings: The cases of voluntary and mandatory interim reports," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 181-217, July.
    40. McNichols, Maureen & Manegold, James G., 1983. "The effect of the information environment on the relationship between financial disclosure and security price variability," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 49-74, April.
    41. repec:aei:rpbook:53337 is not listed on IDEAS
    42. Demski, Joel S. & Feltham, Gerald A., 1994. "Market response to financial reports," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 3-40, January.
    43. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 407-422, December.
    44. Lang, M & Lundholm, R, 1993. "Cross-Sectional Determinants Of Analyst Ratings Of Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 246-271.
    45. Jing Liu & Doron Nissim & Jacob Thomas, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    2. Vanessa Behrmann & Lars Hornuf & Daniel Vrankar & Jochen Zimmermann, 2021. "The Deregulation of Quarterly Reporting and Its Effects on Information Asymmetry and Firm Value," CESifo Working Paper Series 9344, CESifo.
    3. Terry Shevlin, 2013. "Some personal observations on the debate on the link between financial reporting quality and the cost of equity capital," Australian Journal of Management, Australian School of Business, vol. 38(3), pages 447-473, December.
    4. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    5. Emmanuel T. De George & Xi Li & Lakshmanan Shivakumar, 2016. "A review of the IFRS adoption literature," Review of Accounting Studies, Springer, vol. 21(3), pages 898-1004, September.
    6. Schreder, Max, 2018. "Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 142-172.
    7. Adrian, Christofer & Garg, Mukesh & Viet Pham, Anh & Phang, Soon-Yeow & Truong, Cameron, 2022. "Policy and oversight of corporate political activities and the cost of equity capital," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(2).
    8. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.
    9. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.
    10. Christine Botosan, 2006. "Disclosure and the cost of capital: what do we know?," Accounting and Business Research, Taylor & Francis Journals, vol. 36(S1), pages 31-40.
    11. Heitzman, Shane & Wasley, Charles & Zimmerman, Jerold, 2010. "The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 109-132, February.
    12. Mouselli, Sulaiman & Jaafar, Aziz & Hussainey, Khaled, 2012. "Accruals quality vis-à-vis disclosure quality: Substitutes or complements?," The British Accounting Review, Elsevier, vol. 44(1), pages 36-46.
    13. Shan Zhou & Roger Simnett & Wendy Green, 2017. "Does Integrated Reporting Matter to the Capital Market?," Abacus, Accounting Foundation, University of Sydney, vol. 53(1), pages 94-132, March.
    14. Tsao, Shou-Min & Lu, Hsueh-Tien & Keung, Edmund C., 2016. "Voluntary monthly earnings disclosures and analyst behavior," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 37-49.
    15. Max Schreder & Pawel Bilinski, 2022. "Information Quality and the Expected Rate of Return: A Structural Equation Modelling Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(2), pages 139-170, June.
    16. Raf Orens & Walter Aerts & Denis Cormier, 2010. "Web‐Based Non‐Financial Disclosure and Cost of Finance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1057-1093, November.
    17. Hoshik Shim, 2020. "Disclosure Frequency, Information Environment, and Cost of Capital under Regulation Fair Disclosure in the Korean Market," Sustainability, MDPI, vol. 12(14), pages 1-28, July.
    18. Gary McCormick & Dan W. French, 2016. "Effects of frequent information disclosure: the case of daily net asset value reporting for closed-end investment companies," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 107-122, January.
    19. Barth, Mary E. & Konchitchki, Yaniv & Landsman, Wayne R., 2013. "Cost of capital and earnings transparency," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 206-224.
    20. Luc Paugam & Olivier Ramond, 2015. "Effect of Impairment-Testing Disclosures on the Cost of Equity Capital," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 583-618, June.

    More about this item

    Keywords

    Interim reporting frequency; Information asymmetry; Cost of equity;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:54:y:2012:i:2:p:132-149. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.