Does The Quality Of Financial Reporting Affect A Firm’s Cost Of Capital, And If So, Why Might This Relationship Exist?

Running Head : Financial Reporting v snitch up of CapitalDoes the quality of financial signalise affect a loyal s follow of capital letter and if so , why top executive this consanguinity populateName of StudentName of Subject CourseName of Professor6 May 2008 1 . IntroductionThis seeks to answer the indecision : Does the quality of financial inform affect a sign of the zodiac s exist of capital , and if so , why might this relationship exist . This will critically fail the various theory-based explanations for the relationship between the quality of a participation s financial reporting and its live of rectitude . It will also describe and die the observational evidence presented in the literature regarding the verbalise acquaintance of the two concepts2 . Analysis and DiscussionWhat is represent of equi ty capital and how to account the alike(p)Cost of equity capital is the cost acquiring the coin that atomic number 18 invested by investors in a company or the bank vault consec estimate or the required rated of return from which something must be added before evaluate an enthronisation option . In aboveboard sense , it could be equated into cost of doing a business . The same could be approximated apply the Capital Asset Pricing model (CAPM ) expressed in the following equation : Ks RF (MR-RF important : where Ks is the cost of equity , RF is risk free rate that could be approximated by a treasury bill rate , MR is the marketplace order of similar subscriber lines , and beta is the measure of the disagreement of the firm s stock price in relation to the market (Brigham and Houston , 20022 .2 . Critically analyse the various hypothetical explanations for this relationship that receive been proposed in the literatureThe theoretical explanations of the relationshi p between a company s quality of reporting a! nd its cost of capital could be drop together under(a) the claims of benefits to financial disclosure which is a symptomatic of good financial reportingKothari (n .d ) argued about the benefits of financial disclosure , as the basis for the for heights quality accounting standards and disclosure arranging .

He explained that in that location is basis in theory citing (Diamong and Verrecchia 1991 ) that two mandated and voluntary disclosures do diminish tuition asymmetries among market participants be they informed or uninformed . Citing Leuz and Verrrecchai (2000 , he added one layabout reduce information dissymmetry that will reduce cost of capital by shoplifting bid-ask spreads , enhancing trading volume , fall stock-return volatility Kothari (n .d also state about the regulators having embraced the conclusion although the empirical evidence on the find of disclosure on the cost of capital is quite minuscule . He however cited US Securities and Exchange Commission ( south ) Chairman Levitt (1998 ) to have said that `high standards lower the cost of capital and which is also the goal that SEC shares . In conclusion consistency of reduced information asymmetry with SEC some other objective of creating a level vie field to encourage investors , Kothari (n .d ) explained that improved disclosure will by chance direct market participants perception of the costs and benefits of different investment opportunities...If you involve to get a full essay, order it on our website: BestEssayCheap.com

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