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The Economic Consequences of Increased Disclosure

Christian Leuz and Robert E. Verrecchia
Journal of Accounting Research
Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 91-124
DOI: 10.2307/2672910
Stable URL: http://www.jstor.org/stable/2672910
Page Count: 34
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The Economic Consequences of Increased Disclosure
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Abstract

Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the United States is that, under current U.S. reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or U.S. GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms-namely, the bid-ask spread and trading volume-behave in the predicted direction compared to firms employing the German reporting regime.

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