The effect of non-financial risk information on the evaluation of implied cost of capitals


The purpose of this paper is to examine the effect of voluntary disclosure of ‘business risk’ information (hereafter referred to as ‘risk information’), which is a significant determinant of the information environment, on estimating the cost of capital. Recently, some studies indicate that the reliability of the cost of capital estimation differs according to the accounting standards and the information environment of the firm (e.g. Chen et al., 2004; Easton and Monahan, 2005). On the basis of their studies, we predict that the cost of capital will be more precise in firms that proactively disclose risk information voluntarily. Our results suggest that the implied cost of capital reflects risk more appropriately in firms with a high ‘business risk’ disclosure level.

Keywords: implied cost of capital; risk factors; non-financial risk information

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