Goodwill related mandatory disclosure and the cost of equity capital

Accounting

Speaker:Paul André, University of Essec Business School
Website: http://www45.essec.edu/professorsCV/showCV.do?keyUrl=paul-andre
Date: Wednesday 2 April 2014
Time: 14:00
Location: Streatham Court, Lecture Theatre B

Further details

 

Goodwill related mandatory disclosure and the cost of equity capital

 

Motivated by prior literature suggesting that more information can lower cost of equity

capital, we examine whether goodwill related mandatory disclosure reduces implied cost of

equity capital (ICC) for a sample of European firms for the period 2008 to 2011. We focus on

goodwill since it is a significant amount on a company’s balance sheet and gives investors

information on a company’s strategy, at least via mergers and acquisitions. Our results

indicate a robust negative relationship between ICC and expected goodwill related mandatory

disclosure levels. Companies exhibiting high compliance levels with items that provide

proprietary information and reveal managers’ judgment and expectations (e.g., assumptions

used in the application of value in use calculations or a qualitative description of the factors

that make up the goodwill recognised in a business combination) experience significantly

reduced ICC. Further investigation reveals that those companies exhibiting substantially

higher than expected compliance levels with these items, experience even more negative

association with their ICC. Hence, companies benefit an incremental reduction in their ICC

when they disclose more than expected. Overall, our findings add knowledge regarding the

economic consequences of mandatory disclosures, should have an appeal to regulators and

financial statement preparers, and reflect on standard setters pertinent concerns.