Contingent Choice Behavioral Models in the Presence of Information Uncertainty

• Published in: The journal of real estate portfolio management 2010-09, Vol.16 (3), p.289-300
• Main Authors: Dempsey, Stephen J., Harrison, David M., Luchtenberg, Kimberly F., Seiler, Michael J.
• Format: Article
• Language: English
• Subjects: Accounting; Annual reports; Business structures; Capital costs; Capital investments; Capital market; Capital markets; Costs; Disclosure; Financial disclosure; Financial reporting; Financing methods; Grade levels; Influence; Investment trusts; Investments; Linguistics; Opacity; Point of View; Profitability; Profitable firms; Readability; Real estate investment trusts; Real estate market; REITs; Risk; Securities markets; Studies; Transparency; Uncertainty; Valuation
• ISSN: 1083-5547

Recent literature suggests that enhancing the quantity and/or quality of corporate disclosures may influence the non-diversifiable component of information risk for the firm, and hence, have non-trivial valuation implications. We propose a framework that argues a firm's disclosure level balances the potential cost of capital benefits from selective revelation and the disutility of distress, which in turn is a function of the potential costs of obfuscation. The real estate investment trust (REIT) industry provides an experimentally appropriate backdrop for our position due to its generally heavy reliance on external financing and thus its heightened market exposure to priced information risk. Using three potential measures of the opacity of a REIT's annual report: the Flesch-Kincaid Grade Level, the Flesch Reading Ease Score, and the number of words contained in the report, we propose that capital-constrained firms, particularly those with growth ambitions, should be uniquely sensitive to the transparency of their corporate disclosures as opacity materially influences the firm's cost of capital.