Disclosure quality, cost of capital, and investor welfare

Abstract

One might expect that disclosure quality improves investor welfare by reducing cost of capital. This study shows that the argument is valid only in limited circumstances. Based on a production economy with perfect competition among investors, the analysis demonstrates three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/ or new investors. Finally, cost of capital could move in opposition to the welfare of either current or new investors as disclosure quality changes.