Reporting Capabilities, Financial Closing Time and Effects on Cost of Equity Capital

Facing a competitive capital market, firms have incentives to reduce information uncertainty by releasing earnings early. However, firms do differ in how soon they are able to release earnings to investors. We posit that firms cannot reduce their reporting time without underlying accounting information systems that are efficient and effective. Moreover, given the reduced information asymmetry and better managed accounting processes associated with timely reporting, we expect investors to require lower risk premiums on firms that are able to report faster than others. Empirically, we find that firms with shorter time-lags from fiscal-year end to earnings release date (financial closing time) are associated with lower implied cost of capital. This result is robust after controlling for known risk factors influencing cost of capital. We contribute to the body of knowledge by quantifying the benefits of effective information systems in terms of reduced financial reporting time and investors' required risk premium.