RESEARCH CORNER

The value of openness

In the midst of the annual earnings-reporting season, February is a good time for companies to think about the costs and benefits of providing more information to investors than required by regulation. However, many companies are reluctant to do so because, while the direct costs of time and resources and the indirect costs of potential litigation are very real, the benefits are, at best, subjectively appreciated.

In a study recently published in the Journal of Accounting and Economics, Stephen Brown, Stephen Hillegeist, and I explored these benefits, looking at companies' use of conference calls and webcasts to communicate with investors. We found that such communications garnered economically meaningful benefits.

Focusing on the notion that some investors hold an information advantage, we tested the hypothesis that this "information asymmetry" declines when companies begin conference calling on a regular basis. Looking at more than 8,000 conference call initiations, we found that information asymmetry declines by about l/20th (on average)-suggesting a reduction of 25 basis points in the cost of equity capital. Furthermore, we found no effect if the program of conference calls was not sustained.

What does a reduction in capital costs mean for firms that aren't going to be issuing securities anytime soon? Following the well-accepted notion that equity prices equal the present value of future cash flows or earnings, reductions in equity costs should result in higher stock prices. A ballpark estimate of the potential stock-price impact of a 25-basis-point reduction in equity costs is about 5% -not bad for just being more open about your business!