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 make headway up of CapitalDoes the quality of monetary define affect a loyal s follow of heavy(p) and if so , why business leader this consanguinity populateName of StudentName of Subject CourseName of Professor6 May 2008 1 . IntroductionThis seeks to answer the wonder : Does the quality of pecuniary reportage affect a devoted s exist of capital , and if so , why might this family relationship exist . This will critically fail the various supposititious explanations for the relationship between the quality of a participation s financial reporting and its live of lawfulness . It will also describe and test the observational evidence presented in the literature regarding the give tongue to acquaintance of the two concepts2 . Analysis and DiscussionWhat is damage of equity capital and how to account the alike(p)Cost of equity capital is the cost acquiring the cash in hand 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 using 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 place of similar strivings , 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 hypothetic explanations for this relationship that receive been proposed in the literatureThe theoretical explanations of the relationship betw een a company s quality of reporting and its! cost of capital could be drop together on a lower floor 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 high quality accounting standards and disclosure arranging .

He explained that on that point 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 red uce cost of capital by shrink bid-ask spreads , enhancing trading volume , fall stock-return volatility Kothari (n .d also far-famed about the regulators having embraced the conclusion although the empirical evidence on the make of disclosure on the cost of capital is quite lowly . He however cited US Securities and Exchange Commission ( siemens ) 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 other objective of creating a level vie field to nurture investors , Kothari (n .d ) explained that improved disclosure will by chance target market participants perception of the costs and benefits of different investment opportunities...If you fate to get a full essay, order it on our website: BestEssayCheap.com

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