Cost of Capital Free-Riders

ABSTRACT We document the interrelationship of disclosure policy decisions among firms by providing evidence that the cessation of quarterly management forecast guidance by 656 firms (“stoppers”) during 2004–2009 is associated with a pursuant increase in quarterly forecasts by previously non-forecasting firms in the same industries (“free-riders”). Increased forecasting by free-riders is positively associated with the information loss in the industry (proxied by the number of stoppers in the industry, the strength of previously existing information transfer relations between stoppers and free-riders, and whether stoppers and free-riders are peer firms) and the importance of the information loss to the free-riders (proxied by analyst following and the existence of new share issues). Following the cessation event, free-riders' cost of capital decreases as a function of the extent to which free-riders immediately initiate quarterly forecasting. Keywords: management forecasts, disclosure policy, cost of capital, information transfer, free-rider Article Citation: Stephen P. Baginski and Lisa A. Hinson (2016) Cost of Capital Free-Riders. The Accounting Review: September 2016, Vol. 91, No. 5, pp. 1291-1313.