Narrow Results

In deciding how much customer information to disclose, managers face a tradeoff between the benefits of reducing information asymmetry and the losses of revealing proprietary information. This paper investigates which factors affect the level of ambiguous customer identity disclosure and whether such ambiguous disclosure affects the cost of equity capital. The empirical evidence shows that the proprietary cost is a crucial factor in ambiguous customer identity disclosure. Firms with a higher level of ambiguous customer identity disclosure generate a higher cost of equity capital. Moreover, the higher cost of equity capital is concentrated among firms under imperfect market competition.

The primary purpose of this paper is to discuss how to use the active and interdisciplinary approaches to teach corporate finance. First, I describe the content and structure of the book entitled Corporate Finance and Strategy: An Active Learning Approach [Lee, CF, AC Lee, JC Lee and M Lee (2022). World Scientific]. Second, I discuss how the interdisciplinary approach is used to integrate corporate finance and strategy with other subjects. Third, I discussed how I require students to write three projects to make this course become active instead of passive to learn corporate finance. Finally, I discuss how students can benefit from active and interdisciplinary approach to learn finance.

We examine whether SFAS 166/167, which ended exclusion of qualifying special purpose entities (QSPEs) from consolidation, impacted the cost of equity capital for a sample of banks. This exclusion previously allowed banks to avoid consolidating many, risky asset securitization transactions. These transactions were prevalent during and after the global financial crisis (GFC). We compare changes in the cost of equity capital for a sample of banks that consolidated SPEs after implementation of SFAS 166/167, to a control group of banks that reported no material impact of SFAS 166/167. We find the cost of equity capital increased significantly more for the banks consolidating previously unconsolidated SPE’s, than for the banks that were relatively unaffected by the rule change. In particular, we find that banks with greater reductions to their reported Tier-1 capital ratios as a result of consolidation are associated with significantly greater cost of equity capital in the post-SFAS166/167 period.

Using a large panel of UK public firms, we examine the relationship between the financial risk hedging and the cost of equity capital. We hypothesize that firms utilizing financial derivative instruments reduce the stock return volatility which is priced in investors’ expectations. While financial risk hedging serves as a vehicle for firms to alleviate cash flows volatility, it also leads to economic benefits to the firm value in case of the presence of increasing asymmetric information. In addition, we hypothesize and test whether the nature of relation between financial risk hedging and cost of equity capital varies and is more negative or more ambiguous with economic shocks. Our results show that engaging in financial risk hedging enables firms to have a lower cost of capital. Consistent with the extant literature, we control for potential endogeneity problems and sample selection bias using instrumental variables and treatment effects approaches. Thus, our results are robust to a battery of sensitivity checks, including the use of multiple estimation methods and alternative proxies of cost of equity measures. Overall, our findings suggest that the value of financial hedging decisions increases during economic shocks, and if financial constraints become more severe and if cash flows volatility increases.