CORPORATE DISCLOSURE, COST OF CAPITAL AND REPUTATION

Corporate Disclosure, Cost of Capital and Reputation: Evidence from Finance Directors

Corporate Disclosure, Cost of Capital and Reputation: Evidence from Finance Directors

Introduction

The majority view of the executives interviewed is that disclosure reduces the cost of equity up to the issue at which a good-practice level of communication has been come to, after which there is little farther effect. Greater disclosure to ranking agencies and lenders decreases the cost of debt. Attitudes towards more mandatory disclosure are mostly negative. The major seen cost of disclosure is creating the information. The major benefits are promotion of a reputation for openness and of shareholder self-assurance, not a smaller cost of capital. In this paper, the analysis propose that a reputation for openness is valued because it enhances the company's overall reputation, which adds commercial benefits (Armitage, 2008, pp: 321).

Discussion and Analysis

Does director ability sway governance effectiveness? Surprisingly, little is known about the answer to this question as there is scarce empirical study on the relation between director ability and board effectiveness. Recent regulatory undertaking suggests that one specific facet of director is a critical aspect of governance efficacy; expressly that financial expertise is an significant concern for audit managing assembly competency (e.g. Sarbanes-Oxley Act of 2002). Empirical study supports this idea, finding that shareholders benefit from financial literacy and know-how on the audit committee. More usually, Becker (1964) suggests the productivity of agents (directors) counts on a broad range of attributes that comprise their human and social capital. Yet, the academic and popular press has primarily centered on director bias or incentives as the key topic in assessing director efficacy. Although, promise confrontations of concern are significant, we propose that in the day-to-day operations of the board, director capital is of primary importance. One cause is that board capital is critical to shareholders is because they have little recourse for poor decision-making due to restricted ability or skill. In contrast, in a robust legal system with somewhat powerful safeguards, shareholders and government regulators can litigate or prosecute controllers for board mistakes due to conflicts of interest. In supplement, economic theory suggests that short- and long-run incentives can mitigate lesson hazard difficulties and that agency proficiency is identically significant to out-of-doors shareholders. Moreover, Hermalin and Weisbach (2006) suggest that while punishments or guidelines can affect potential confrontations of concern in many circumstances, they have little influence on board ability (Armitage, 2008, pp: 333).

Casual inspection reveals that boards vary across firms with substantial differences amidst directors in terms of their human and social capital. Two firms with the identical percentage of independent directors, the identical number of directors, and alike incentive means may not be identically productive because their directors have differing expertise, skills, and social contacts. Holmstrom (1999) observes that the agency ability is a key concern in purchasing work services (i.e. hiring directors) and that reputation concerns are expanding in agency ability. In this context, we contend that the human and communal capital of both the board and audit ...