In this article, we investigate whether intellectual capital (IC) and financial disclosures jointly affect the firm’s cost of equity capital. In contrast to prior research, we disaggregate disclosures into IC and financial disclosures and examine whether the two disclosure types are jointly related to the cost of equity capital. We also investigate whether IC and financial disclosures have an interaction effect on the cost of equity capital. Using data for a sample of 125 U.K. firms, we find a negative relationship between the cost of equity capital and IC disclosure. We find that the relationship between financial disclosure and the cost of equity capital is magnified when combined with IC disclosure. In addition, we find that IC and financial disclosures interact in shaping their effects on the cost of equity capital. Further analyses suggest that the effect of financial disclosure on the cost of equity capital is augmented for firms characterized by a medium level of IC disclosure. These results provide important insights into the relationship between disclosures and cost of equity capital and have policy and practical implications.
AboodyD.LevB. (1998). The value-relevance of intangibles: The case of software capitalization. Journal of Accounting Research, 36, 161-191.
2.
AboodyD.LevB. (2000). Information asymmetry, R&D and insider gains. Journal of Finance, 55, 47-66.
3.
AikenL. S.WestS. G. (1991). Multiple regression: Testing and interpreting interactions. London, England: SAGE.
4.
AmihudY.MendelsonH. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17, 223-249.
5.
AmirE.LevB. (1996). Value relevance of non-financial information: The wireless communications industry. Journal of Accounting & Economics, 22, 3-30.
6.
BarthM. E.KasznikR.McNicholsM. (2001). Analyst coverage and intangible assets. Journal of Accounting Research, 39, 1-34.
7.
BeattieV.ThomsonS. J. (2007). Lifting the lid on the use of content analysis to investigate intellectual capital disclosures. Accounting Forum, 31, 129-163.
8.
BotosanC. A. (1997). Disclosure level and the cost of equity capital. Accounting Review, 72, 323-349.
9.
BotosanC. A. (2006). Disclosure and the cost of equity capital: What do we know? [Special issue]. Accounting and Business Research, 36(Suppl.), 31-40.
10.
BotosanC. A.PlumleeM. A. (2002). A re-examination of disclosure level and the expected cost of equity capital. Journal of Accounting Research, 40, 21-40.
11.
BotosanC. A.PlumleeM. A. (2005). Assessing alternative proxies for the expected risk premium. Accounting Review, 80, 21-53.
12.
BotosanC. A.PlumleeM. A.XieY. (2004). The role of information precision in determining the cost of equity capital. Review of Accounting Studies, 9, 233-259.
13.
BozzolanS.O’ReganR.RicceriF. (2005). Intellectual capital disclosure across Europe: A comparison between Italy, Ireland and the UK. Journal of Human Resource Costing & Accounting, 10, 92-113.
14.
ChanL. K. C.LakonishokK.SougiannisT. (2001). The stock market valuation of research and development expenditures. Journal of Finance, 56, 2431-2456.
15.
Chartered Institute of Management Accountants. (2001). Managing the IC within today’s knowledge-based organisations (Technical briefings). London, England: Author.
16.
CheahE.JamaliD.JohnsonJ. E. V.SungM. (2011). Drivers of corporate social responsibility attitudes: The demography of socially responsible investors. British Journal of Management, 22, 305-323.
17.
ChengC. S. A.CollinsD.HuangH. H. (2006). Shareholder rights, financial disclosure and the cost of equity capital. Review of Quantitative Finance and Accounting, 27, 175-204.
18.
ColesJ.LoewensteinU.SuayJ. (1995). On equilibrium pricing under parameter uncertainty. Journal of Financial and Quantitative Analysis, 30, 347-364.
19.
CooperS. (2006). Discussion of disclosure and the cost of capital: What do we know? [Special issue]. Accounting and Business Research, 36(Suppl.), 41-42.
20.
DiamondD.VerrecchiaR. (1991). Disclosure, liquidity and the cost of capital. Journal of Finance, 46, 1325-1359.
21.
EasleyD.O’HaraM. (2004). Information and the cost of capital. Journal of Finance, 59, 1553-1583.
22.
EastonP. D. (2004). PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital. Accounting Review, 79, 73-79.
23.
El GhoulS.GuedhamiO.KwokC. C.MishraD. R. (2011). Does corporate social responsibility affect the cost of capital?Journal of Banking and Finance, 35, 2388-2406.
24.
EngL. L.TeoH. K. (2000). The relationship between annual report disclosures, analysts’ earnings forecasts and analyst following: Evidence from Singapore. Pacific Accounting Review, 11, 219-239.
25.
EspinosaM.TrombettaM. (2007). Disclosure interactions and the cost of equity capital: Evidence from the Spanish Continuous Market. Journal of Business Finance and Accounting, 34, 1371-1392.
26.
FamaE.FrenchK. (1992). The cross-section of expected stock returns. Journal of Finance, 47, 427-465.
27.
FamaE.FrenchK. (2004). New lists: Fundamentals and survival rates. Journal of Financial Economics, 73, 229-269.
28.
FrancisJ. R.KhuranaI. K.PereiraR. (2005). Disclosure incentives and effects on cost of capital around the world. Accounting Review, 80, 1125-1162.
29.
GalemaR.PlantingaA.ScholtensB. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking and Finance, 32, 2646-2654.
30.
Garcia-MecaE.MartinezI. (2007). The use of intellectual capital information in investment decisions: An empirical study using analyst reports. Journal of International Accounting, 42, 57-82.
31.
GebhardtW.LeeC.SwaminathanB. (2001). Towards an implied cost of capital. Journal of Accounting Research, 39, 135-176.
32.
GietzmannM. B.IrelandJ. (2005). Cost of capital, strategic disclosures and accounting choice. Journal of Business Finance & Accounting, 32, 599-634.
33.
GietzmannM. B.TrombettaM. (2003). Disclosure interactions: Accounting policy choice and voluntary disclosure effects on the cost of raising outside capital. Accounting and Business Research, 33, 187-203.
34.
GodeD.MohanramP. (2003). Inferring the cost of capital using the Ohlson-Juettner model. Review of Accounting Studies, 8, 399-431.
35.
GrayS. J.MeekG. K.RobertsC. B. (1995). International capital market pressure and voluntary annual reports disclosure by US and U.K. multinationals. Journal of International Financial Management and Accounting, 6, 43-67.
36.
GuensterN.BauerR.DerwallJ.KoedijkK. (2011). The economic value of corporate eco-efficiency. European Financial Management, 17, 679-704.
37.
GujaratiD. N. (2003). Basic econometrics. Boston, MA: McGraw-Hill.
38.
GuthrieJ.PettyR.RicceriF. (2007). Intellectual capital reporting investigations into Australia and Hong Kong. Edinburgh: The Institute of Chartered Accountants of Scotland (ICAS).
39.
HailL. (2002). The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms. European Accounting Review, 11, 741-773.
40.
HealyP. M.PalepuK. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting & Economics, 31, 405-440.
41.
HM Treasury. (2008, March). The UK economy: An analysis of long-term performance and strategic challenges. Author. Available from http://www.hm-treasury.gov.uk
42.
HollandJ. (2003). Intellectual capital and the capital market—Organisation and competence. Accounting, Auditing and Accountability Journal, 16, 39-48.
43.
HollandJ. (2006). Fund management, intellectual capital, intangibles and private disclosure. Managerial Finance, 32, 277-316.
HsuL.WangC. (2012). Clarifying the effect of intellectual capital on performance: The mediating role of dynamic capability. British Journal of Management, 23, 179-205.
46.
IttnerC.LarckerD. (1998). Are non-financial measures leading indicators of financial performance? An analysis of customer satisfaction. Journal of Accounting Research, 36, 1-35.
47.
KellerK. L. (2002). Strategic brand management: Building, measuring, and managing brand equity. Upper Saddle River, NJ: Prentice Hall.
48.
KristandlG.BontisN. (2007). The impact of voluntary disclosure on cost of equity capital estimates in a temporal setting. Journal of Intellectual Capital, 8, 577-594.
49.
LambertR. C.LeuzC.VerrecchiaR. (2007). Accounting information, disclosure, and the cost of capital. Journal of Accounting Research, 45, 385-420.
50.
LeeE.WalkerM.ChristensenH. B. (2006). The cost of capital in Europe: An empirical analysis and the preliminary impact of international accounting harmonization. London, England: The Association of Chartered Certified Accountants.
51.
LevB. (2001). Intangibles: Management, measurement and reporting. Washington, DC: The Brookings Institution.
52.
LiJ.PikeR.HaniffaR. (2008). Intellectual capital disclosure and corporate governance structure in UK firms. Accounting and Business Research, 38, 137-159.
53.
LuftJ. L.ShieldsM. D. (2001). Why does fixation persist? Experimental evidence on the judgement performance effects of expensing intangibles. Accounting Review, 76, 561-587.
54.
MangenaM.PikeR. (2005). The effect of audit committee characteristics on interim financial disclosures. Accounting and Business Research, 35, 327-349.
55.
MuinoF.TrombettaM. (2009). Does graph disclosure bias reduce the cost of equity capital?Accounting and Business Research, 39, 83-102.
56.
NagarV.RajanM. V. (2001). The revenue implications of financial and operational measures of product quality. Accounting Review, 76, 495-513.
57.
NeumanW. L. (2003). Social research methods: Quantitative and qualitative approaches (5th ed.). London, England: Allyn & Bacon.
58.
NikolaevV.van LentL. (2005). The endogeneity bias in the relation between cost of debt capital and corporate disclosure policy. European Accounting Review, 14, 677-724.
59.
OhlsonJ.Juettner-NaurothB. (2005). Expected EPS and EPS growth as determinants of value. Review of Accounting Studies, 10, 349-365.
60.
OrensR.AertsW.LybaertN. (2009). Intellectual capital disclosure, cost of finance and firm value. Management Decision, 47, 1536-1554.
61.
PikeS.RylanderA.RoosG. (2002). Intellectual capital management and disclosure. In BontisN.ChooC. W. (Eds.), The strategic management of intellectual capital and organizational knowledge (pp. 643-656). New York, NY: Oxford University Press.
62.
RajgopalS.ShevlinT.VenkatachalamM. (2003). Does the stock market fully appreciate the implications of leading indicators for future earnings? Evidence from order backlog. Review of Accounting Studies, 8, 461-492.
63.
RichardsonA. J.WelkerM. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26, 597-616.
64.
SinghI.Van der ZahnJ. L. M. (2007). Does intellectual capital disclosure reduce an IPO’s cost of capital: The case of underpricing. Journal of Intellectual Capital, 8, 494-516.
65.
UnermanJ.GuthrieJ.StriukovaL. (2007). UK reporting of intellectual capital. London, England: Institute of Chartered Accountants of England and Wales (ICAEW).
66.
WalshG.MitchellV.JacksonP. R.BeattyS. E. (2009). Examining the antecedents and consequences of corporate reputation: A customer perspective. British Journal of Management, 20, 187-203.
67.
WelkerM. (1995). Disclosure policy, information asymmetry and liquidity in equity markets. Contemporary Accounting Research, 11, 153-174.
