Goodwill Related Mandatory Disclosure and the Cost of Equity Capital

• In Event: Disclosure Compliance and Quality

Abstract

Motivated by prior literature suggesting that more information can lower cost of equity capital, we examine whether goodwill related mandatory disclosure reduces implied cost of equity capital (ICC) for a sample of European firms for the period 2008 to 2011. We focus on goodwill since it is a significant amount on a company’s balance sheet and gives investors information on a company’s strategy, at least via mergers and acquisitions. Our results indicate a robust negative relationship between ICC and expected goodwill related mandatory disclosure levels. Companies exhibiting high compliance levels with items that provide proprietary information and reveal managers’ judgment and expectations (e.g., assumptions used in the application of value in use calculations or a qualitative description of the factors that make up the goodwill recognised in a business combination) experience significantly reduced ICC. Further investigation reveals that those companies exhibiting substantially higher than expected compliance levels with these items, experience even more negative association with their ICC. Hence, companies benefit an incremental reduction in their ICC when they disclose more than expected. Overall, our findings add knowledge regarding the economic consequences of mandatory disclosures, should have an appeal to regulators and financial statement preparers, and reflect on standard setters pertinent concerns.

Authors

• Francesco Mazzi, University of Florence

• Paul Andre, Essec Business School

• Ioannis Tsalavoutas, University of Stirling

• Dionysia Dionysiou, University of Stirling