Does hedge disclosure influence cost of capital for European banks?

Tamer Elshandidy*, Albert Acheampong

*Corresponding author for this work

Research output: Contribution to JournalArticlepeer-review

Abstract

Upon extracting and quantifying relevant hedge information from the narrative section of European banks annual reports, this paper examines the impact of such information on cost of capital [as measured by weighted average cost of capital (WACC), cost of equity (COE) and cost of debt (COD)]. Using a sample of 1885 bank-year observations from 19 countries, we find that textual hedge disclosure leads to a significant reduction in WACC, COE, and COD; thus explains a substantial portion of variation in cost of capital. Further, we find that these
results are stronger in countries with high corruption and financial openness. Our results are robust to several controls and model specification. Collectively, our findings enrich prior evidence which examines the economic consequences of hedge disclosure.
Original languageEnglish
Article number101942
JournalInternational Review of Financial Analysis
Volume78
Early online date27 Oct 2021
DOIs
Publication statusPublished - 1 Nov 2021

Keywords

  • Hedging
  • Cost of capital
  • cost of equity
  • cost of debt
  • Textual Analysis
  • Annual Reports

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