Research Summary
Research Summary
Managing Financial Reporting and the Effect on Firms' Costs of Capital
Description
Amy P. Hutton's research investigates the impact of capital market forces and firm contracts on financial reporting and disclosure policies. Specifically, her research examines how managers use financial reporting to convey a firm's strategy, and the effect of managerial disclosure policies on their firm's cost of capital. Recently, Hutton documented (with Patricia Dechow and Richard Sloan of the University of Michigan) how the capital markets impose costs on firms subject to enforcement by the Securities and Exchange Commission, through lower liquidity in the securities markets and difficulty in issuing new capital. In related work (with Paul Healy and Krishna G. Palepu), Hutton has found that firms benefit from expanded disclosure through increased liquidity, greater interest from analysts, and lower costs of capital. Taken together, her research supports the proposition that managers can lower their firms' cost of capital, thereby increasing their firms' value, by building a reputation for reliable financial reporting.