Goodwill related mandatory disclosure and the cost of equity capital

The present study examines whether enhanced mandatory disclosure reduces implied cost of equity capital. Prior cross-sectional studies focusing exclusively on voluntary disclosure have produced mixed results. This is why it has been suggested to go beyond voluntary information in analysing the relationship between disclosure and cost of capital. Considering evidence suggesting that firms do not fully comply with disclosure requirements, even if they are supposed to, this paper deals with mandatory disclosure. More specifically I examine the relationship between goodwill related mandatory disclosure and the implied cost of capital for a sample of 225 European firms for the period from 2008 to 2011. The findings suggest that enhanced mandatory disclosure is correlated with the cost of capital, but that this correlation depends on the materiality of the information, measured as the percentage of goodwill to total assets.