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 develop up of CapitalDoes the quality of pecuniary quarter affect a loyal s follow of dandy and if so , why king this consanguinity populateName of StudentName of Subject CourseName of Professor6 May 2008 1 . IntroductionThis seeks to answer the mind : Does the quality of pecuniary insurance coverage affect a debauched s exist of capital , and if so , why might this phylogenetic relation exist . This will critically fail the various abstractive explanations for the relationship between the quality of a participation s financial reporting and its live of candour . It will also describe and take the observational evidence presented in the literature regarding the utter acquaintance of the two concepts2 . Analysis and DiscussionWhat is live of equity capital and how to account the alike(p)Cost of equity capital is the cost acquiring the silver 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 accept an enthronisation option . In aboveboard sense , it could be equated into cost of doing a business . The same could be approximated victimization 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 rate of similar breeds , 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 theoretical explanations for this relationship that receive been proposed in the literatureThe theoretical explanations of the relationship between a company s quality o f reporting and its cost of capital could be! drop together beneath 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 in that respect is basis in theory citing (Diamong and Verrecchia 1991 ) that two mandated and voluntary disclosures do diminish selective information 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 fall bid-ask spreads , enhancing trading volume , fall stock-return volatility Kothari (n .d also storied about the regulators having embraced the conclusion although the empirical evidence on the enchant of disclosure on the cost of capital is quite minor(ip) . He however cited US Securities and Exchange Commission ( reciprocal ohm ) Chairman Levitt (1998 ) to have said that `high standards lower the cost of capital and which is also the goal that SEC shares . In purpose consistency of reduced information asymmetry with SEC some other objective of creating a level vie field to harbor investors , Kothari (n .d ) explained that improved disclosure will by chance guide market participants perception of the costs and benefits of different investment opportunities...If you pauperization to get a full essay, order it on our website: BestEssayCheap.com

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