Information Disclosure, Growth, and the Cost of Capital

This paper studies how information disclosure affects the cost of equity capital (i.e., risk premium) and investors welfare in a dynamic setting with overlapping generations of investors. Our analysis demonstrates that a firm’s cost of capital decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) a certain threshold. The threshold growth rate is higher for firms with more persistent cash flows. We find that while current shareholders always prefer maximum public disclosure, future shareholders’ welfare decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) the threshold. Our results extend to multi-firm large economies in which a firm’s risk premium depend only on its systematic risk. We find that a firm’s threshold growth rate below which its risk premium declines in disclosure quality is lower (higher) when other firms in the economy are growing at fast (slow) rates. We also examine a production economy in which information disclosure has real effects on firms’ internal investment choices. JEL classification: G12, D90, M45.