منافع اقتصادی افشاگری های توصیه شده FASB : شواهدی از صنعت داروسازی

Prior research has documented an association between disclosure quality and various economic benefits, most notably between the cost of equity capital and market liquidity. We extend this literature by investigating whether pharmaceutical firms that comply with recommended voluntary disclosures of the Financial Accounting Standards Board (FASB) exhibit lower bid–ask spreads, greater market depth, and lower cost of equity capital. Cross-sectional analysis using pharmaceutical firms reveals a negative association between disclosure quality and bid–ask spreads (both the total spread and its adverse-selection component), but no association between disclosure quality and either market depth or the ex ante cost of equity capital. Overall, our findings provide some evidence of benefits accruing to pharmaceutical firms that comply with the FASB's recommended voluntary disclosures under the assumption that lower bid–ask spreads reduce the cost of capital and strong evidence that complying with FASB's recommended disclosures provide a direct benefit to small investors, those who bear the entire weight of bid–ask spreads.

In 2001 the Financial Accounting Standards Board (FASB) published “Improved Business Reporting: Insights into Enhancing Voluntary Disclosure” as part of their broader Business Reporting Research Project, hereafter the “EVD Report” (FASB, 2001). The EVD Report was intended to identify “best practices” in non-financial disclosure for firms operating in eight different industries (including the pharmaceutical industry) with the objective of helping “…companies (the preparer community) improve their business reporting by providing evidence that many leading companies are making extensive voluntary disclosures and by listing examples of these disclosures…” (FASB, 2001, v). The report was explicitly premised on the assumption that “…improving disclosures…reduces the average cost of capital” (FASB, 2001, v). To date, it is an unsettled issue as to whether greater compliance with the FASB's recommended disclosures (EVD Compliance) is rewarded with economic benefits, including a lower average cost of capital. We lend insight into this issue by investigating whether greater EVD Compliance by pharmaceutical firms is associated with a lower cost of equity capital, lower bid–ask spreads and greater market depth as was assumed by the FASB. We focus on pharmaceuticals because the heightened information asymmetry arising from their significant investment in intangible assets suggests potentially strong effects arising from expanded voluntary disclosure (Core, 2001) and thus the pharmaceutical industry emerges from the set of eight industries (examined in the EVD Report) as the most favorable setting to test for these assumed benefits. Our cost of capital tests are based on ex ante cost of equity capital measures. The ex ante tests have the virtue of providing comparability with prior studies (e.g., Botosan, 1997 and Botosan and Plumlee, 2002), yet are limited because the ex ante cost of equity capital cannot be observed and must be empirically estimated. We measure the ex ante cost of equity capital using the PEG metric (Easton, 2004) and analyze it using pooled cross-sectional regressions. We follow our cost of capital tests with market liquidity tests intended to determine whether greater EVD Compliance is associated with greater market liquidity as measured by narrower bid–ask spreads (both total and adverse-selection component) and greater market depth. We focus on both spreads and depth to provide a more complete analysis because market makers can adjust either or both to protect against the risk of informed trading (Lee, Mucklow, & Ready, 1993). We find that EVD Compliance is negatively associated with bid–ask spreads (both the total spread and its adverse-selection component). We find no evidence that EVD Compliance is associated with market depth or the ex ante cost of capital. Interpreted in light of existing theory, these findings suggest that EVD Compliance appears to improve capital markets by reducing information asymmetry among investors and thus investors' transaction costs, but does not appear to induce market makers to increase market depth or induce investors to use lower equity discount rates.3 These findings contribute to the literature in at least two ways. First, our results provide feedback information to the FASB by documenting that EVD Compliance in the pharmaceutical industry is associated with one type of economic benefit they assumed would follow (i.e., greater market liquidity). Second, our results provide evidence that greater EVD Compliance in the pharmaceutical industry benefits one of the FASB's constituents, small investors who incur the full cost of bid–ask spreads. Third, we document in yet another setting the economic benefits associated with high quality financial reporting using an industry-specific metric of disclosure quality that is independent of the reporting quality metric commonly used in prior studies (i.e., the ranking of financial reporting published by the Association for Investment Management and Research [AIMR]). The AIMR measure of financial reporting is available only for the very largest firms within each industry (typically 10 to 20 firms), which has the effect of introducing a size-related selection bias and necessitating an interindustry design (due to the limited number of firms within any one industry). Our intraindustry research design arguably has greater internal validity as compared to interindustry tests with much less size-related selection bias. Thus, our study also contributes by probing the sensitivity of prior research to size-related selection bias and uncontrolled interindustry effects. The remainder of this paper is divided into five sections. Section 2 reviews the prior literature, develops our motivation, and presents our research hypotheses. Section 3 presents a discussion of FASB's recommended disclosures. Section 4 describes the sample and variables used in the tests of ex ante cost of capital and market liquidity. Section 5 describes these research methods and findings. Section 6 reports several robustness checks and Section 7 summarizes and concludes our paper.