Essay I

Investment Plan Disclosure, Investment Horizon of Institutional Investors, and the Cost of Equity

Using a large sample of manually collected capital investment forecast data between 1996 and 2015, I find that firms disclosing capital investment plan have lower cost of equity. The results remain after controlling for accruals quality, management earnings forecast, and other determinants of the cost of equity, and also survive after controlling for firm fixed effects. A difference-in-differences test shows that the cost of equity decreases after a firm initiates a policy to disclose capital investment plan. Further evidence shows that the effects of capital investment plan disclosure on the cost of equity are more pronounced when investors have longer investment horizon,...[ Read more ]

Essay I

Investment Plan Disclosure, Investment Horizon of Institutional Investors, and the Cost of Equity

Using a large sample of manually collected capital investment forecast data between 1996 and 2015, I find that firms disclosing capital investment plan have lower cost of equity. The results remain after controlling for accruals quality, management earnings forecast, and other determinants of the cost of equity, and also survive after controlling for firm fixed effects. A difference-in-differences test shows that the cost of equity decreases after a firm initiates a policy to disclose capital investment plan. Further evidence shows that the effects of capital investment plan disclosure on the cost of equity are more pronounced when investors have longer investment horizon, and when firms have lower investment efficiency in the past. I do not find similar pattern for management earnings forecast. Finally, I find capital investment plan disclosure is associated with higher investment efficiency, lower propensity to cut discretionary expenditures and meet or beat short-term analyst earnings forecast. Overall, the evidence suggests that capital investment plan disclosures decrease the cost of equity by improving price informativeness about firms’ long-term value and enhancing real decision making efficiency.

Essay II

Voluntary Disclosure, Forecasting Price Efficiency and Revelatory Price Efficiency

Recent literature distinguishes between forecasting price efficiency (FPE) and revelatory price efficiency (RPE) and suggests that different disclosures can affect FPE and RPE differently. I contrast the role of management capital investment forecast and earnings forecast in affecting FPE and RPE. I find that both capital investment forecast and earnings forecast are associated with higher FPE, as reflected in a greater extent of prices leading earnings. However, only capital investment forecast is associated with higher RPE, as reflected in a higher investment-to-price sensitivity. The association between earnings forecast and the investment-to-price sensitivity is negative. Further analyses show that the positive association between capital investment forecast and RPE is more pronounced when institutional ownership is higher, and when managers are less certain about the capital investment. Adjustment to capital investment plans is also more sensitivity to stock price changes when capital investment plans are disclosed. Overall, my results are consistent with management capital investment forecasts stimulating stock prices revealing information to improve the efficiency of real decision making.