Voluntary Disclosure and the Cost of Capital

We investigate the association between voluntary disclosure and the risk-related discount investors apply to price. First, we study the association between (endogenous) disclosure choice and the discount in price induced by changes in the underlying model parameters: this informs empirical research that ignores endogeneity of disclosure by, for example, omitting the exogenous determinants of disclosure and the discount in price from the regressions employed. Second, we investigate the incremental effect of disclosure on the discount in price: this informs empirical research that controls for the direct effect of exogenous factors on the discount in price by, for example, including the exogenous variables in regression models employed. Finally, we examine the incremental effect of disclosure on the discount in price when changes in disclosure are not induced by changes in underlying exogenous parameters: this further informs empirical research that controls for the effect of exogenous factors on both the discount in price and disclosure, and focuses on the association between ‘unexplained disclosure’ and the discount.