Financial disclosure attributes and the cost of equity capital

: a study on the UK FTSE-350 firms

Abstract

This dissertation investigates the relationship between the qualitative disclosure of financial reports (commonly referred to as financial narratives) and the cost of equity capital of firms, with the aim of identifying attributes that may contribute to improving evaluation models. Based on the literature review, the dissertation is divided into three parts, each related to an attribute of qualitative disclosure that may explain this relationship. These attributes include the complexity of language, the tone, and the level of forward-looking disclosure. It also includes a fourth part, where firms are categorized based on their performance, measured through the return on assets. This division allowed for an investigation into potential differences in the impact of these three disclosure attributes between firms with high versus low performance levels. Empirical studies are presented to support these expectations, using a sample of annual report disclosures of UK FTSE-350 firms, from 2015 to 2018. The dissertation finds that the complexity of language is statistically insignificant in explaining the cost of capital. The results for the tone and forward-looking disclosures were ambiguous. Nonetheless, it appears that they have an impact on the cost of capital. The dissertation concludes that there is a relationship between qualitative disclosure and the cost of equity capital. The findings highlight the importance of qualitative disclosure and suggest that firms should carefully consider the complexity of language, tone, and level of forward-looking disclosure in their financial reporting process to minimize the cost of equity capital. This dissertation adds to the existing body of literature by presenting empirical findings on how qualitative disclosures can affect a company's cost of equity capital. Moreover, it identifies crucial attributes of such disclosures that, if effectively utilized, can aid firms in improving their communication with investors and in better managing their capital costs.

Date of Award	13 Jul 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Paulo Alves (Supervisor)