Management Forecasts and the Cost of Equity Capital: International Evidence

Abstract

In this paper, we examine international differences in the effect of management forecasts (which we use to proxy for voluntary disclosure) on the cost of equity capital (COC) across 31 countries. We find that the issuance of management forecasts is associated with a lower COC worldwide, but the effect of management forecasts on the COC is conditional on country-level institutional factors. Specifically, management forecasts have a stronger effect on the COC in countries with stronger investor protection and with better information dissemination, and a weaker effect in countries with higher mandatory disclosure requirements. Further analyses reveal that these relations are more pronounced when management forecasts are more frequent, more precise, and more disaggregated. Overall, our findings suggest that the ability of management forecasts to reduce firms’ COC derives not only from country-level factors that enhance the credibility of their forecasts, but also from factors that reflect the quality of the information environment in terms of the distribution of news and the availability and quality of alternative information. Thus, investor protection, media penetration, and mandatory disclosure requirements have an important effect on the ability of management forecasts to lower the COC.

Keywords: Management Forecasts, Voluntary Disclosure, International, Cost of Capital

JEL Classification: M4, M41, M45, G29, G12