The Hidden Value of Employee Pay Disclosures Evidenced through Cost of Capital

• Main Author: Sherman, Christopher Michael
• Other Authors: Accounting and Information Systems
• Format: Others
• Published: Virginia Tech 2020
• Subjects: Voluntary Disclosure; Employee Pay Disclosure; Salary Expenses; Cost of Capital
• Online Access: http://hdl.handle.net/10919/97569

Voluntary disclosure theory suggests a firm increasing its disclosures should lower the information asymmetry component of its cost of capital. Empirical results on specific disclosures are mixed though, as individual disclosures may not provide enough value to investors in disclosure rich environments. Salary expense disclosures, unlike some other cost disclosures, may provide insight into increasing firm risk leading to an increased cost of capital, as employee pay has been shown to increase in response to leverage increases. I examine whether salary expense disclosures provide valuable information to investors, as measured through a disclosing firm's cost of capital, and I examine the channels through which the disclosure provides the information. I find that firms that disclose salary expense receive a lowered cost of capital if they are disclosing more stable cost structures, and the value of this disclosed information relates to the relative risk associated with the disclosed cost structures. I also find the propensity for firms to initiate disclosure increases as more analysts follow the firm and these initiating firms receive a lower cost of capital in exchange for their initial disclosure. Additionally, this lower cost of capital for initial disclosers is not based on the relative stability of the disclosed cost structure. === Doctor of Philosophy === Theory suggests when a company voluntarily discloses information that is useful to investors, the investors will pay more for that company's stock which equates to a lower cost of capital for the company. Empirical results on individual disclosures are mixed though, as each disclosure may not provide enough value to investors in environments where companies disclose a large amount of information. Salary expense disclosures, unlike some other cost disclosures, may provide insight into increasing firm risk leading to an increased cost of capital for the disclosing companies, as employee pay has been shown to increase in response to leverage increases. I examine whether salary expense disclosures provide valuable information to investors, as measured through a disclosing firm's cost of capital, and I examine the channels through which the disclosure provides the information. I find that firms that disclose salary expense receive a lowered cost of capital if they are disclosing more stable cost structures, and the value of this disclosed information relates to the relative risk associated with the disclosed cost structures. I also find the propensity for firms to initiate disclosure increases as more analysts follow the firm and these initiating firms receive a lower cost of capital in exchange for their initial disclosure. Additionally, this lower cost of capital for initial disclosers is not based on the relative stability of the disclosed cost structure.