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Firm Growth and Disclosure: An Empirical Analysis

Published online by Cambridge University Press:  06 April 2009

Inder K. Khurana ,
Raynolde Pereira  and
Xiumin Martin
Inder K. Khurana
Affiliation:
[email protected], School of Accountancy, College of Business, University of Missouri, Columbia, MO 65211.
Raynolde Pereira
Affiliation:
[email protected], School of Accountancy, College of Business, University of Missouri, Columbia, MO 65211.
Xiumin Martin
Affiliation:
[email protected], School of Accountancy, College of Business, University of Missouri, Columbia, MO 65211.
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Abstract

Extant theoretical research posits that information asymmetry and agency issues affect the cost of external financing and hence impact the ability of firms to finance their growth opportunities. In contrast, the literature on disclosure policy posits that expanded and credible disclosure lowers the cost of external financing and improves a firm's ability to pursue potentially profitable projects. An empirical implication is that disclosure can help firms grow by relaxing external financing constraints, thereby allowing capital to flow to positive net present value projects. This paper empirically evaluates this prediction using firm-level data over an 11-year period. As anticipated by theory, we find a positive relation between firm disclosure policy and the externally financed growth rate, after controlling for other influences.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 2 , June 2006 , pp. 357 - 380
Copyright
Copyright © School of Business Administration, University of Washington 2006

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