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Toward Real‐Time Financial Reporting: How to Reduce Investors' Information Gap and the Cost of Capital

Toward Real‐Time Financial Reporting: How to Reduce Investors' Information Gap and the Cost of... Public companies are struggling to provide detailed and accurate guidance in a turbulent world. Many have dropped guidance altogether, or substantially reduced the precision of their guidance. However, they pay a price for the resulting increase in investor uncertainty in the form of a higher cost of capital and reduced equity valuations. This article provides evidence that improving investors' information can help to reduce the cost of capital of public companies. A look at market data for the years 2007 through 2009 for German DAX 30 companies suggests that investor uncertainty stemming from current financial reporting practices appears to be amplifying the expected association between increases in the beta coefficient and the volatility of fundamentals such as revenues and income, which in turn could be increasing the cost of equity capital. The article explores ways for both individual companies and financial regulators to improve investor information and reduce the cost of capital. For individual companies, the proposed solution is more frequent and voluntary provision of information about actual performance in lieu of more extensive financial guidance. A look at market data for the years 2007 through 2009 for German DAX 30 companies suggests that investor uncertainty stemming from current financial reporting practices appears to be amplifying the expected association between increases in the beta coefficient and the volatility of fundamentals such as revenues and income, which in turn could be increasing the cost of equity capital. Quarterly reporting is a matter of tradition while today's information technology could easily provide investors with real‐time, or close to real‐time, financial information. Internal financial controls, the quality of financial reporting, and the cost of capital might all be improved by mandating faster reporting cycles. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

Toward Real‐Time Financial Reporting: How to Reduce Investors' Information Gap and the Cost of Capital

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Publisher
Wiley
Copyright
Copyright © 2012 Morgan Stanley
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/j.1745-6622.2012.00389.x
Publisher site
See Article on Publisher Site

Abstract

Public companies are struggling to provide detailed and accurate guidance in a turbulent world. Many have dropped guidance altogether, or substantially reduced the precision of their guidance. However, they pay a price for the resulting increase in investor uncertainty in the form of a higher cost of capital and reduced equity valuations. This article provides evidence that improving investors' information can help to reduce the cost of capital of public companies. A look at market data for the years 2007 through 2009 for German DAX 30 companies suggests that investor uncertainty stemming from current financial reporting practices appears to be amplifying the expected association between increases in the beta coefficient and the volatility of fundamentals such as revenues and income, which in turn could be increasing the cost of equity capital. The article explores ways for both individual companies and financial regulators to improve investor information and reduce the cost of capital. For individual companies, the proposed solution is more frequent and voluntary provision of information about actual performance in lieu of more extensive financial guidance. A look at market data for the years 2007 through 2009 for German DAX 30 companies suggests that investor uncertainty stemming from current financial reporting practices appears to be amplifying the expected association between increases in the beta coefficient and the volatility of fundamentals such as revenues and income, which in turn could be increasing the cost of equity capital. Quarterly reporting is a matter of tradition while today's information technology could easily provide investors with real‐time, or close to real‐time, financial information. Internal financial controls, the quality of financial reporting, and the cost of capital might all be improved by mandating faster reporting cycles.

Journal

Journal of Applied Corporate Finance – Wiley

Published: Sep 1, 2012

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