Growth Matters: Disclosure and Risk Premium

A number of theoretical studies predict an unconditional negative association between firm risk premium and firm disclosure level, where additional disclosure reduces estimation risk or information asymmetry. Empirical studies based on these models frequently report mixed results. Dutta and Nezlobin (2016) propose a model where the effect of disclosure on risk premium differs based on the firm’s long-term growth rate relative to a threshold rate, which reflects the relative importance of short-term cash flows and long-term cash flows. When the long-term growth rate exceeds the threshold, greater disclosure increases the firm’s risk premium, rather than decreasing it. Motivated by the findings in their model, we estimate four long-term growth rate thresholds and reexamine the relation between risk premium and disclosure level conditional on those thresholds. We provide evidence that the association between risk premium and disclosure is positive (negative) for firms with long-term growth rates above (below) a threshold long-term growth rate, as predicted by Dutta and Nezlobin (2016).