دانلود رایگان ترجمه مقاله خوانایی گزارش سالانه و هزینه سرمایه سهام

خوانایی گزارش سالانه و هزینه سرمایه سهام

Annual Report Readability and the Cost of Equity Capital

Abstract

This paper examines the effect of annual report readability on the cost of equity capital in a sample of unique 288 French firms between 2002 and 2006. After controlling for several risk factors, the results show that firms with less readable annual reports exhibit a higher cost of equity capital. This finding is consistent with the notion that more complex corporate disclosures deter investors’ ability to process and interpret annual reports, who require in turn a higher cost of capital. This study supplements the huge body of research that investigates the relation between disclosure quality and the cost of equity capital with novel results and enhances our understanding of the role of corporate narrative disclosures in capital markets. Our results are shown to be robust to the use of various econometric methods and to the inclusion of alternative proxies for annual report readability.

1 Introduction

The U.S. Securities and Exchange Commission has set in motion, since its establishment, a continuous effort to streamline and simplify firms’ reporting to promote better information disclosure for the benefit of general investors. The rationale is that regulators and standard setters view disclosure quality as a key determinant of capital allocation efficiency in the stock market. For instance, Mary Schapiro the former chairman of the SEC, argues that the primary focus of the agency is to “ensure that investors have the information that they need in a form that is helpful to them to make decisions about the allocation of their capital” (Schapiro (2011)). An equally important rationale is that regulators strongly believe that increased disclosure quality can lower firms’ cost of capital (Levitt (1997)). Considering the latter issue, a voluminous body of literature investigates the relation between disclosure quality and the cost of equity capital in different settings.

Theoretically, there is a strong support for the cost of equity effect of reporting quality (e.g. Diamond and Verrecchia (1991); Easley and O’Hara (2004); Lambert et al. (2007)). However, empirical results are mixed and inconclusive. One of the main reasons why previous studies fail to draw clear-cut conclusions is that proxies of disclosure quality are plagued with many problems (Beyer et al. (2010)). Recently, evidence against the empirical validity of accounting quality proxies is mounting. For example, Wysocki (2009) demonstrates that the measures obtained from the Dechow and Dichev (2002) discretionary accruals model do not accurately capture firm’s accounting quality since their ability to distinguish between discretionary and non-discretionary accruals is limited. In this paper, we attempt to overcome these limitaitons by using alternative empirical constructs derived from the computational linguistics litertature and based on syntactic and semantic features of annual reports. In doing so we respond to the call by Core (2001) for using natural language processing technology to capture the quality of disclosure. The drive for using these techniques continues to gain momentum. For instance, Beyer et al. (2010) and Berger (2011) argue that readability measures seem to offer a promisig way to gauge the firms’ financial reporting quality.

In the present study we examine the empirical link between annual report readability and the cost of equity capital in a sample of French firms spanning the 2002-2006 period after controlling for several firm-specific factors that have already been identified by prior studies as systematically affecting equities’ cost of capital. Consistent with our predictions, we find that firms enjoy a cheaper access to equity financing when their annual reports are easier to read. These findings are significant for several reasons. First, they corroborate earlier research establishing a link between information quality and the cost of capital, but using novel measures of the disclosure quality based on lexical properties of annual reports. Second, they contribute to our understanding of the role of narrative disclosure in capital markets and extend the longstanding debate on the relation between disclosure and the cost of capital beyond the narrow focus of financial numbers. Finally, our study is one of the few, if not the first, to investigate the cost of capital effects of corporate narrative disclosure. A concurrent paper by Kothari et al. (2009) also examines the relation between corporate narrative disclosure and the cost of capital. However, our papers differ is two important respects. First, we investigate the the readability and other textual properties that capture the characteristics of annual reports, whereas their study focuses on the content of disclosure. Second, we rely on sevral ex-ante cost of equity capital models, based on residual income valuation methods and abnormal earnings growth valuation methods, to infer firms’ equity financing costs. In contrast, they gauge the cost of equity using the Fama and French (1993) three-factor model. Elton (1999) and Fama and French (2002) show that this model generates biased and noisy estimates of expected returns.

The paper proceeds as follows. In the next section, we develop our hypotheses. In section 3, we describe our data and construct the varibles used in this study. In Section 4, we report summary statistics and correlations among variables. In the penultimate section, we present our empirical findings. In the last section, we summarize and conclude our study.