Do Firms Benefit from Expanded Voluntary Disclosure?

This paper examines the causes and consequences of expanded disclosure for 90 firms with increased analyst disclosure ratings. Our evidence suggests that managers expand disclosure when they believe their firms are undervalued. Undervaluation is costly for the sample firms because it reduces their financial flexibility in making new public issues and lowers the value of outstanding management stock options. Following the increase in disclosure there is a reduction in undervaluation accompanied by an increase in stock liquidity analyst following and institutional holdings. This evidence suggests that for our sample firms expanded disclosure lowers their costs of capital