Marlene Plumlee

A Re-examination of Disclosure Level and the Expected Cost of Equity Capital

This paper examines the association between the cost of equity capital and levels of annual report and timely disclosure, and investor relations activities. We estimate the cost of equity capital using the classic dividend discount model. We find that the cost of equity capital decreases in the annual report disclosure level but increases in the level of timely disclosures. The latter result is contrary to theory but is consistent with managers’ claims that greater timely disclosures may increase the cost of equity capital, possibly through increased stock price volatility. We find no association between the cost of equity capital and the level of investor relations activities. We conclude that aggregating across different disclosure types results in a loss of information. Failing to include all disclosure types in regression analyses may lead to a correlated omitted variable bias and erroneous conclusions.

An Analysis of the Underlying Causes Attributed to Restatements

The dramatic increase in the number of restatements filed over the past years has been attributed to numerous causes, including the complexity of the accounting standards, internal control reviews, changes in materiality thresholds, the overly conservative nature of auditors, earnings management, increased transaction complexity, and the second guessing of management judgments, by a variety of interested parties. However, empirical evidence on the underlying causes of restatements has been lacking. This study provides such evidence by directly addressing the questions of: (1) to what causes are restatements attributed, (2) to what characteristics of the accounting standards are restatements attributed, and (3) has the materiality threshold for restatements has fallen over the years? Relying on the restating companies’ disclosures about restatements, we find that companies most often attribute restatements to basic internal company errors unrelated to any specific characteristic of the accounting standards. We also find that, for those restatements attributed to some characteristic of the accounting standards, the primary contributing factor is the lack of clarity in applying the standards and/or the proliferation of the literature due to the lack of clarity in the original standard. These findings should be of interest to standard setters and regulators in addressing the proliferation of restatements and to academics in using restatements as proxies for constructs of interest in research.

Are Information Attributes Priced?: ARE INFORMATION ATTRIBUTES PRICED?

A seminal model in finance links cost of equity capital to information precision, composition and dissemination. Using realized returns to proxy for cost of equity capital and the probability of an informed trade (PIN) to proxy for composition, prior research documents results consistent with the models prediction regarding composition. Nonetheless, prior research that examines the construct validity cautions against the use of future realized returns to proxy for cost of equity capital and recommend r or r instead. The authors speculate but do not demonstrate how the results in existing research might be incorrect due to their use of realized returns. This paper provides such evidence. We find that the authors inference regarding PIN is dependent on their choice of realized returns to proxy for cost of equity capital. We also estimate a more complete specification of the model that includes precision and dissemination, and we decompose PIN into its component parts to isolate that portion of PIN that varies with dissemination. These refinements allow for new insights regarding the veracity of the models predictions. We conclude that cost of equity capital is increasing in composition, and decreasing in dissemination, and find some, albeit not conclusive support, for the prediction that cost of equity capital is decreasing in precision.

Do Companies Attempt to Strategically Hide Restatements? An Examination of Companies’ Regulatory Filing Choices

This study explores the factors associated with companies’ regulatory filing choices surrounding the restatement of previously filed financial statements. Companies have three regulatory filing alternatives of decreasing transparency: file an 8-K report, file an amended report, or restate the previous financial statements in subsequent regulatory filings. We examine whether the transparency of the regulatory filing decision is associated with the materiality of the restatement and/or company-specific strategic factors. We document that the decision to file 8-K reports is increasing with the materiality factors rather than with companies attempting to strategically hide restatements. The SEC’s rule change that clarified companies’ duties to report restatements in 8-K reports increased the use of 8-Ks, although it did not affect the importance of the various factors in that decision. The amended filing decision, a less transparent choice for which the SEC provides little to no guidance, is more complex: strategic factors are significantly associated with the amended filing decision both prior to and subsequent to the 8-K rule change. In addition, after the SEC rule change, companies are less likely to file amended reports but when an 8-K is filed, the company is more likely to also file an amended report. Our results suggest that the SEC guidance regarding the 8-K restatement filing requirements appears to have led to the intended consequences for 8-K filings, and that the SEC should perhaps consider providing additional guidance on the amended filing requirements.

Growth Matters: Disclosure and Risk Premium

A number of theoretical studies predict an unconditional negative association between firm risk premium and firm disclosure level, where additional disclosure reduces estimation risk or information asymmetry. Empirical studies based on these models frequently report mixed results. Dutta and Nezlobin (2016) propose a model where the effect of disclosure on risk premium differs based on the firm’s long-term growth rate relative to a threshold rate, which reflects the relative importance of short-term cash flows and long-term cash flows. When the long-term growth rate exceeds the threshold, greater disclosure increases the firm’s risk premium, rather than decreasing it. Motivated by the findings in their model, we estimate four long-term growth rate thresholds and reexamine the relation between risk premium and disclosure level conditional on those thresholds. We provide evidence that the association between risk premium and disclosure is positive (negative) for firms with long-term growth rates above (below) a threshold long-term growth rate, as predicted by Dutta and Nezlobin (2016).