Annual report

Incentive

Capital (architecture)

Initial public offering

World Wide Web

Linguistics

Philosophy

Actuarial science

Cost of capital

Microeconomics

Equity capital markets

Literature

Accounting

Archaeology

Narrative

Economics

Market economy

Computer science

Relation (database)

Business

Database

Index (typography)

Political science

Monetary economics

Valuation (finance)

Implicit cost

Equity capital

Equity (law)

Total cost

History

European Accounting Review

We hypothesize and test for a U-shaped relation between the cost of equity capital and the level of disclosure in annual report narratives. Using a computer-generated word-count-based index of the level of disclosure in U.K. annual report narratives, we document a negative relation with the cost of equity capital at low levels of disclosure, and a positive relation at higher levels of disclosure, together implying the presence of an optimal level of disclosure. We interpret the positive relation at higher levels of disclosure as evidence of uninformative clutter increasing the cost of equity capital. Additional analyses indicate the presence of both firm-level learning and regulatory corporate reporting initiatives as factors shaping adjustments towards optimum levels of disclosure.

Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shaped Relation