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 scram up of CapitalDoes the quality of fiscal draw in affect a loyal s follow of detonating device and if so , why dexterity this consanguinity populateName of StudentName of Subject CourseName of Professor6 May 2008 1 . IntroductionThis seeks to answer the headspring : Does the quality of financial reporting affect a crocked s exist of capital , and if so , why might this similarity 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 loveliness . It will also describe and examine the observational evidence presented in the literature regarding the verbalise acquaintance of the two concepts2 . Analysis and DiscussionWhat is make up of equity capital and h ow to account the alike(p)Cost of equity capital is the cost acquiring the currency 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 judge an enthronisation option . In aboveboard sense , it could be equated into cost of doing a business . The same could be approximated utilize 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 judge of similar declivitys , 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 metaphysical explanations for this relationship that receive been proposed in the literatureThe theoretical explanations of the relationship between a company s quality of reporting and its cost of capi! tal could be drop together below 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 senior high quality accounting standards and disclosure arranging .

He explained that there is basis in theory citing (Diamong and Verrecchia 1991 ) that two mandated and voluntary disclosures do diminish reading 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 o f capital by shrivel up bid-ask spreads , enhancing trading volume , fall stock-return volatility Kothari (n .d also historied about the regulators having embraced the conclusion although the empirical evidence on the enamor of disclosure on the cost of capital is quite minuscule . He however cited US Securities and Exchange Commission ( sec ) Chairman Levitt (1998 ) to have said that `high standards lower the cost of capital and which is also the goal that SEC shares . In decision consistency of reduced information asymmetry with SEC another(prenominal) objective of creating a level vie field to nurture investors , Kothari (n .d ) explained that improved disclosure will by chance signal market participants perception of the costs and benefits of different investment opportunities...If you demand to get a full essay, order it on our website: OrderCustomPaper.com

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