Corporate risk disclosure and cost of capital: does measurement matter?

Awad Ibrahim, Ahmed Aboud

Research output: Contribution to journalArticlepeer-review

109 Downloads (Pure)

Abstract

This study argues that different definitions/perceptions of risk information could affect investors' decisions differently. Using a sample of 328 non-financial UK firms and departing from existing literature, this study measures corporate risk disclosure (RD) via computerized content analysis to capture four different perspectives of defining RD. This study investigates (i) the effects of these RD measures on the Cost of Capital (COC), (ii) the influence of analysts' coverage on the relationship between RD and COC, and (iii) whether the RD nature (favourable/unfavourable) might affect COC differently. Lenders and equity holders are found not to consider any risk information expressed as a variation around a target, while only lenders consider risk information that reveals negative outcomes. However, lenders and equity holders consider risk information that expresses negative and positive outcomes together. Besides, firms that disclose extra risk information and have a large analyst following suffer from a higher Cost of Equity (COE) compared with those with fewer analysts following. Additionally, lenders impose a lower interest rate on firms with a higher unfavourable RD, while equity holders ask for lower returns from the firms with a higher favourable RD. The study has significant implications for capital market participants, researchers, and policymakers.
Original languageEnglish
Number of pages28
JournalInternational Journal of Finance and Economics
Early online date17 Jul 2023
DOIs
Publication statusEarly online - 17 Jul 2023

Keywords

  • annual report
  • cost of debt
  • cost of equity
  • Risk Disclosure

Fingerprint

Dive into the research topics of 'Corporate risk disclosure and cost of capital: does measurement matter?'. Together they form a unique fingerprint.

Cite this