Information asymmetry, segment disclosures, and cost of equity capital

Abstract

Using the ex ante measures of the cost of equity capital and a hand-developed index measure of the level of segment disclosures, this study examines the theoretical negative association between the cost of equity capital and the level of segment disclosure in presence of the probability of informed trade and the managerial blockholding. OLS regression estimates are obtained using the US firms data for the year 2005.

Findings and Conclusions:

This study finds that the theoretical negative association between the cost of equity capital and the level of segment disclosures is increasing in the existing probability of informed trade. This study also finds mixed evidence in support of the contention that the negative association between the cost of equity capital and the level of segment disclosures is increasing in the absence of managerial blockholdings. Further, the increasing effect of probability of informed trade dominates the effect of managerial blockholdings on the association between the cost of equity capital and the level of segment disclosure. Overall, the evidence suggests that the negative association between the cost of equity capital and the level of segment disclosures is increasing in the probability of informed trade and the absence of managerial blockholdings.