Cost of Equity Capital and Annual Report Tone Manipulation

ABSTRACT

This paper empirically studies the relationship between the cost of equity capital and annual report tone of listed firms’ annual reports from 2007 to 2019 in China. It is discovered that the greater the firm’s cost of equity capital, the more positive the tone of the manipulated annual report. In addition, in firms with lower quality of accounting information and higher degree of industry competition, the impact of cost of equity capital on the degree of tone manipulation is more significant, indicating that the impact of cost of equity capital on the positive tone disclosure of annual report is a deliberate manipulation behavior. The heterogeneity analysis shows that the cost of equity capital has a more significant impact on the tone manipulation of corporate annual reports in non-state-owned corporates than in state-owned corporates. Further analysis shows that the increase of the cost of equity capital will lead to the decline of investor’s confidence and corporate value and is also the mechanism of the cost of equity capital affecting the annual report note manipulation. Further analysis shows that the increase of the cost of equity capital will lead to the decline of investor’s confidence and corporate value, which is also the mechanism of the cost of equity capital affecting the annual report note manipulation.

KEYWORDS:

• Annual report tone manipulation
• cost of equity capital
• quality of accounting information
• industry competition degree

JEL:

• M4

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Additional information

Funding

This work is supported by the Platform Construction Project of Zhongnan University of Economics and Law, China [grant no. 31512241232].