Disclosure Level and Cost Equity: A Theoretical Framework

Abstract

Nowadays the users of financial reports are more demanding and requesting better information of a company’s performance. With the sophistication in the business environment, disclosure is becoming more important to business communities. The impact of information disclosure in the annual reports to the cost of equity capital is of significant interest to managers. This paper review literatures from many theoretical papers and empirical studies the effect information disclosure on cost equity capital. Many theories being discuss in this paper such as agency cost theory, signaling theory, capital markets transaction hypothesis, and positive accounting theory. Many empirical studies proved that disclosure reduce cost equity capital by reducing the information asymmetry and increasing the companies’ liquidity.