TY  - JOUR
AU  - Leuz,Christian
AU  - Schrand,Catherine
TI  - Disclosure and the Cost of Capital: Evidence from Firms’ Responses to the Enron Shock
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14897
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14897
L1  - http://www.nber.org/papers/w14897.pdf
N1  - Author contact info:
Christian Leuz
Booth School of Business
University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637-1610
Tel: 773/834-1996
Fax: 773-834-4585
E-Mail: cleuz@chicagobooth.edu

Catherine Schrand
University of Pennsylvania
E-Mail: schrand@wharton.upenn.edu
AB  - This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock created by the Enron scandal in Fall 2001 and analyze firms’ disclosure responses to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate concerns about omitted variables in traditional cross-sectional disclosure studies. We estimate shocks to firms’ betas around the Enron events and the ensuing transparency crisis. Our analysis shows that these beta shocks are associated with increased disclosure. Firms expand the number of pages of their annual 10-K filings, notably the sections containing the financial statements and footnotes. The increase in disclosure is particularly pronounced for firms that have positive cost of capital shocks and larger financing needs. We also find that firms respond with additional interim disclosures (e.g., 8-K filings) and that these disclosures are complementary to the 10-K disclosures. Finally, we show that firms’ disclosure responses reduce firms’ costs of capital and hence the impact of the transparency crisis.
ER  -