Financial Report Voluntary Disclosure and the Relevance of Accounting Information: The Cost of Capital as Intermediary

This paper will analyze how disclosure in the financial reports is voluntary; the effect of voluntary disclosure on the relevance of accounting information and in this case, the mediating influence of the cost of capital. The increasing dependency of capital markets on non financial as well as financial information is what motivated the study to come up with a unified explanation of how voluntary disclosure will improve the usefulness of accounting information in the market valuation.
The analysis of the panel database of non-finance companies listed on an organized stock exchange of a number of years is conducted using a deductive quantitative research design. The measure of voluntary disclosure is a disclosure score evaluated on the basis of a content analysis of annual reporting and the measure of value relevance is that of price based valuation model between stock prices, earnings and book values. The cost of equity is used to proxy the cost of capital used in the market based models. The direct relationships are tested using panel regression techniques with fixed effects and the direct effect conducted using the mediation method to measure the indirect effect transmitted through the cost of capital.
The empirical findings indicate that voluntary disclosure positively and significantly impacts the accounting information value relevance. The results also show that voluntary disclosure is related to less cost of capital and the cost of capital affects the value relevance negatively and significantly. Most importantly, the mediation analysis proves the cost of capital partially mediates the relationship between the voluntary disclosure and value relevance signifying that disclosure boosts the usefulness of accounting information both directly and indirectly by lowering the financing costs.
The research paper adds to literature in accounting and finance because of its strong evidence on the role of voluntary disclosure in economic effects, and identification of the cost of capital as a major channel of transmission between disclosure practices and the capital market performance. The results also provide valuable implications to investors, corporate management, and regulators in that transparent and consistent voluntary disclosure policy can be used to enhance the market efficiency, accuracy in valuation and decrease the cost of financing by the firm.