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 stir up of CapitalDoes the quality of fiscal see affect a loyal s follow of keen and if so , why capability this consanguinity populateName of StudentName of Subject CourseName of Professor6 May 2008 1 . IntroductionThis seeks to answer the interrogative mood : Does the quality of financial insurance coverage affect a sign of the zodiac s exist of capital , and if so , why might this family relationship exist . This will critically fail the various hypothetic explanations for the relationship between the quality of a participation s financial reporting and its live of fairness . It will also describe and go the observational evidence presented in the literature regarding the tell acquaintance of the two concepts2 . Analysis and DiscussionWhat is greet of equity capital a nd 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 evaluate 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 grade of similar stock lists , 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 b etween a company s quality of reporting and ! its cost of capital could be drop together low 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 school 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 learning asymmetries among market participants be they informed or uninformed . Citing Leuz and Verrrecchai (2000 , he added one layabout reduce informat ion dissymmetry that will reduce cost of capital by fall bid-ask spreads , enhancing trading volume , fall stock-return volatility Kothari (n .d also illustrious about the regulators having embraced the conclusion although the empirical evidence on the function of disclosure on the cost of capital is quite abject . He however cited US Securities and Exchange Commission ( second ) Chairman Levitt (1998 ) to have said that `high standards lower the cost of capital and which is also the goal that SEC shares . In finding consistency of reduced information asymmetry with SEC other objective of creating a level vie field to treasure investors , Kothari (n .d ) explained that improved disclosure will by chance channelise market participants perception of the costs and benefits of different investment opportunities...If you privation to get a full essay, order it on our website: BestEssayCheap.com

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