欢迎来到留学生英语论文网

当前位置:首页 > 论文范文 > Accounting

Investigate how the voluntary disclosures affect firm value

发布时间:2017-03-13
该论文是我们的学员投稿,并非我们专家级的写作水平!如果你有论文作业写作指导需求请联系我们的客服人员

Proposal.

Executive summary

Introduction

The modern information age with the high level of competition dictates the new rule of the game in the financial market. Companies always change their politics in order to be up to date and satisfy shareholders needs. The users of the financial information are always adjusting their needs according new economic conditions. One of the prior problems is the information gap between managers and shareholders. One of the possible means is the voluntary disclosure of the financial information (e.g.: stock price information) as well as non-financial (e.g.: social responsibilities). The aim of this proposal to give the introduction to the problem of how voluntary disclosure effect cost of capital.

Financial reporting and disclosures by management are the main means of informing investors of company’s performance. Outside investors rely on the stream of information that company provides through the number of ways such as regulatory filing and voluntary communication with investors (Healy and Palepu, 2001). An anticipated earnings per share is on of the main voluntary disclosure instrument through which managers provide the information concerning future financial position of the firm. The recent report of Anilowski, Feng and Skinner (2007) explores that the number of firms that have disclose voluntary earning guidance have increased since 1990 up to 30 per cent. We intend to investigate of economic implication of management earnings forecasts of UK firms. In particular, how management earnings forecasts influence the assessment of firm value.

This research intends to focus on the suggestion that the voluntary disclosure decrease the cost of capital through the reducing estimated risk or increasing market liquidity. According to recent survey of Graham et al. (2005) showed that 90% executives believes that the forward-looking forecasts of earnings lower the information risk and cost of capital. The relationship between the voluntary disclosure and firm value is quite challenging. The prior studies such as Clement et al. (2003) found that there is negative correlation between earnings forecasts and cost of capital. Francis et al. (2008) argued that there is positive relation between these two factors; the management earnings forecasts increase the cost of capital. To understand the difficulties there is need to estimate indirect link and direct link between firm value and earnings forecast.

Recent studies suggest that firms more often voluntary disclose bad news than good news (e.g., Skinner 1994, Cao and Narayanamoorthy 2011). Specifically, managers use pessimistic earnings forecasts in order to meet low expectations of outside users of information or not to fall behind analytics’ forecasts (Skinner and Sloan (2002) and Grahamet al. (2005). There are also evidences from the other studies that good news of management earnings forecasts positively effect price reaction and bad news effect negatively (Ajinkya and Gift, 1984; Waymire, 1984; Pownall and Waymire, 1989). The recent studies emphases the short-term results such as immediate reaction of stock price, which is leading to reduction in bid-ask spread (Coller and John, 1997).

The present study will focus on investigating how the voluntary disclosure affects the firm value by estimating the relationship between management earnings forecasts and cost of capital. Firstly, it is discussed the recent studies concerning the main topic; after what there is the sample of data selection and the way of methodology of evaluating the problem.

Literature review.

The purpose of the paper is to evaluate the relationship between level of disclosure and cost of capital, to establish how does level of disclosure affect cost of capital. There were a number of studies that analyze association between voluntary disclosure and cost of equity. Theoretical researches such as Bo Botosan (2006), Hail and Leuz (2007) examine the theoretical relation of disclosure, liquidity and cost of capital. Botosan’s research suggests that the greater level of disclosure reduce investors’ estimation risk, which consequently lowers cost of capital. Hail and Leuz study, on the other hand, suggests that the higher level of disclosure reduce information asymmetry and transaction costs.

Hail and Leuz (2007) argues that uninformed investors’ behavior may be characterized as a fear that more informed investors can buy the same share cheaper, consequently they go to the capital market. Less informed investors are trying to protect themselves buying or selling at the lower or higher price, which forms the ask-bid spread into secondary shares markets and reduce the number of shares are trading by uninformed shareholders. Thus, the liquidity reduces by both effects. Botosan (2006) argues that disclosure reduce investors motivation to obtain costly private information. Hail and Leuz (2007) discussed that disclosure reduce information asymmetry and therefore divide investors on the different levels. Thus, it is difficult and costly to become privately informed and also it reduces the uncertainty of the firm’s value and therefore both increase market liquidity. Company’s value affected by low liquidity and ask-bid spread that enforces transaction costs for investors.

Easly and O’Hara (2004) study suggests that investors request the higher return from the companies, which hold more private information. They based their research on effects of public and private information on the return using the asset-pricing model. They investigate that disclosure reduce transaction costs which lower cost of equity for all firms. However, they do not forecast cross-sectional results whether cost of capital lower necessary in the economy with more information or it does not necessary.

Returning to Botosan, her study suggests that estimation risk arises because investors are uncertain about return of the security and payoff distribution. Investors and financial analysts are using all existing information to forecast future cash flows. She also defines that the higher the estimation risk the higher cost of capital, so the estimation risk cannot be diversified.

Hail and Leuz (2007) also described that voluntary disclosure affects management decisions. Voluntary disclosure affects real management decisions, which affects future cash flows and therefore cost of equity of the company.

Moving to empirical researches, it can be defined number of which are based on US market and European market.

For the US there is not so much empirical evidences how voluntary disclosure associated with cost of capital. Botosan (1997) did an empirical research where she defined the direct relation between voluntary disclosure and cost of capital. She based her analysis on 122 US manufacturing firms. She tested the firms’ background, non-financial information of the company, historical operations and management of development analysis. It was found that form companies with low analyst coverage the association with voluntary disclosure is very important, whereas for companies with high analyst coverage the association is not so important.

Later, Botosan and Plumlee examined 668 US companies from the different industries. They take into account two types of disclosure: voluntary and mandatory. The main idea of the research was that any type of disclosure level and cost of capital have the negative relation, however, it was investigated that relation varies depending of the type of disclosure. It was also concluded that more timely disclosure more affects stock price and therefore cost of equity.

The further investigation by Gelb and Zarowin (2002) was focused on the correlation between corporate disclosure and stock price informativeness. They took into account 821 US companies from the several different industries. The study was based on the hypothesis that the higher disclosures level the higher earnings response coefficient. They concentrated that level of disclosure leads to stronger relation between current return and future earnings. There were concluded that level of disclosure is more associated with stock prices that has more information of future earnings.

Moving to researches that based on the European market, there are number of can be highlighted. First of all, it is worth mentioning Hail (2002). He based his empirical research on the Swiss firms and the main idea is the negative correlation between corporate disclosure and anticipated cost of equity capital. There was taken into account only disclosure from the annual reports. The report had shown that there is significant correlation between level of disclosure and cost of equity capital.

Gietzmann and Ireland (2005) had focused their research on the cost of capital, strategic disclosures and accounting choice. Research developed the idea that firms with aggressive accounting choice have negative relation of timely disclosure and of capital, whereas coast of capital equal cost of equity capital; and firms with conservative accounting choice have no relationship between timely disclosure and cost of capital. The results suggest that there is significant association between accounting choice and cost of capital, therefore it can be concluded that to describe the association between level of disclosure and cost of capital we need to take into account the accounting choice.

Research objective and research question.

The research question related to this study is whether voluntary disclosure added value for stock exchange listed companies in the UK. The value for the company is considering cost of capital. To answer for this question it is needed to formulate sub-question: first of all, it will be determine what the theories of voluntary disclosure; what is determinants for voluntary disclosure level; what is effects of voluntary disclosure; and also it is important to investigate the previous studies concerning voluntary disclosure and cost of capital.

The hypothesis will be considered during the research; however, two of them can be defined.

The first hypothesis of study is to define whether level of voluntary disclosure increase or decrease cost of capital of the company. The prior studies suggest that the greater voluntary disclosure reduce information asymmetry and therefore reduce cost of capital of the firm, as was stated before. However, there is the contradiction studies of Kim and Verrecchia [1994], Zhang [2001], that suggest that the increased cost of capital influenced by disclosure themselves which have lead to information asymmetry. Zhang (2001) also suggests the model when the relation of voluntary disclosure and cost of capital depends on causes variation in disclosure level. When the variation driven by earnings variability, variability of liquidity shocks, or the cost of information analysis then disclosure level and cost of capital are positively correlated. However, in the case when the variation of disclosure causes by disclosure costs, cost of capital negative related to disclosure level.

The present study will focus on single voluntary disclosure, management forecast of earnings, which mostly related to payoffs forecasts for investors. The direct link of management earnings forecasts and payoffs allows reducing information asymmetry and provide great opportunity to test disclosure quality and cost of equity capital.

The further related issue is analysis of how earnings quality influences companies’ disclosure decision. The firm with poor/good information quality will issue more/less expensive disclosure because information asymmetry is high/less between firm and investors of that firm. Another studies show that as information quality increases managers have the motivation to disclose more. Hence, firms with the poor/good earnings quality disclose less/more expensive disclosure, because investors will consider this disclosure less/more reliable. (Verrecchia [1990). As the probability of being informed increases the probability of disclosure also increases because market interpret nondisclosure as bad news and therefore reduce company’s value (Verrecchia [1990).

Data collection and analysis

Data sample for dissertation will consist 20-40 companies chosen from on of the following list of industries: media, oil and gas, technology and retail industries from FTSE all shares for the fiscal years from 2005 to 2007. All data will be collected from DataStream database, Bloomberg and companies annual reports.

This study is going to estimate the regression model like model existing in the research of Botosan and Plunlee (2002):

CE = β0 + β1 ARDSCORE + β3MVAL + β4MBETA + β5LEV+ εi

Whereas CE – depended variable – cost of capital;

β0: intercept, measures the expected value of the risk free rate if the regression equal zero;

ARDSCORE: ranked score of the level of voluntary disclosure made available in the annual report;

MVAL: proxy for size;

MBETA: market beta;

MBR: market-to-book ratio;

LEV: leverage;

β1 until β5: slope coefficients;

εi: error term, measures the variables that influence the cost of equity but are not included in the model.

To identify the relationship between voluntary disclosure and cost of capital it is needed to measure the level of disclosure or voluntary disclosure scores, cost of capital and control variables

To estimate the level of voluntary disclosure within the present study as proxy will be chosen self-constructed scores. The previous studies have used the number of proxies for the firms with voluntary disclosure practices such as management forecasts, conference calls, self-constructed scores and externally scores (AIMR disclosure scores and S&P disclosure scores). Botosan and Plamlee (2002) have used AIMR score for the descriptive data and the results have been skewed for the very large firms. It should be noted that AIMR-FAF and S&P currently available for the S&P followed firms (Healy and Palepu work 2001). For this study it has been chosen to measure disclosure scores according to Botosan (1997) coding scheme. It is also relevant to use the disclosure index developed by Petersen and Plenborg (2006), which they used to measure the level of voluntary disclosure of Danish firms. The disclosure index for this research will measure the amount of voluntary disclosure from the annual reports of the firms for the two years. The amount of voluntary disclosure will be proxy of the quality of voluntary disclosure.

The measurement of the cost of capital is difficult and there are a several method for estimating cost of capital.

  1. The classic dividend discount model
  2. The capital asset pricing model
  3. The price-earnings growth ratio model

According the previous researches (Botosan, 2006, Botosan and Plumlee 2002, Hail 2002 and Botosan 1997) the PEG-ratio and DDM are most reliable models. The CAPM provide no role for disclosure level. The CAPM assume that the market beta is the only one influence the cost of capital; it does not capture all market risk. For this research has been chosen the PEG-ratio model to measure the implied cost of capital. Botosan and Plumlee (2005) stated that it has more comprehensive construction and it is most reliable model. It is also true that it is required less calculation, because the data is only needed is price and earnings growth. To obtain the data for the calculation it will use the I/B/E/S from DataStream.

Company’s size, listing status, country and industry are potentially influences the relation between voluntary disclosure and cost of equity capital. However, in this study will be used as a control variables company’s size, listing status, market beta, market to book ratio and leverage. In all above mentioned studies size of the firm, market beta, book to market ratio and leverage were included as a control variable. All of them were significant for the relation between voluntary disclosure and cost of equity capital.

Project Chapters.

  1. Abstract
  2. Table of content
  3. Abbreviation
  4. Table of figures
  5. List of tables
  1. Introduction
    1. Background
    2. Research focus, Aim and Individual Research Objectives
    3. Conclusion
  1. Literature review
    1. Voluntary disclosure
    2. Voluntary disclosure and cost of capital
    3. Voluntary disclosure and earnings quality
  2. Data and methodology
    1. Research methodology
    2. Measurement of voluntary disclosure
    3. Measurement of the cost of capital
    4. Measurement of control variables
    5. Regression model
    6. Sample selection
  3. Empirical results
  1. Conclusion
  1. Limitation, suggestion for future research
  1. References
  2. Appendix

Conclusion

Task and milestones

References

上一篇:The role of Internal Capital Markets in pooling and allocating financial resources. 下一篇:Exploring the ethical issues at Positive Accounting Solutions