1. Qiao Liu, University of Hong Kong
CFS021002HK-ZWE391-ql
CFS021002HK-ZWE391-ql
Comments on Regulation Fair Disclosure and the Cost of Equity Capital (by Zhihong Chen, Dan Dhaliwal, and Hong Xie )
Qiao Liu, University of Hong Kong
2006 NTUICF
December 2006

2. CFS021002HK-ZWE391-ql
Focus of This Study – does regulation fair disclosure reduce the cost of equity capital?
Using three models to calculate cost of equity capital --- Gebhardt, Lee, and Swaminathan (2001) (GLS); Claus and Thomas (2001) (CT); and Gode and Mohanram (2003) (GM)
Documenting evidence that the post-FD dummy significantly explains the implied cost of capital
The reduction of cost of capital concentrates on the medium and large sized firms
Firms with severe selective disclosure have a larger decrease in cost of capital in post-FD period
The paper thus helps us understand the benefits associated with Reg. FD.

3. Various robustness checks make the results quite convincing
CFS021002HK-ZWE391-ql
Overall Comments
This paper empirical attacks an important issue – Does Reg. FD help reduce cost of equity capital. It is well motivated.
Clearly specified research questions; detailed documentation of empirical evidence
Various robustness checks make the results quite convincing

4. The Measurement issues
CFS021002HK-ZWE391-ql
The Measurement issues
The paper uses three different methods to calculate cost of capital. However, all of them rely on forecasted earnings or forecasted growth rate
Are there any built-in weaknesses associated with these approaches?
I would argue that the Reg. FD will also affect the forecasted earnings (more precise or less precise?), thus it will affect the implied cost of equity capital. But such a relation is mechanical. May have nothing to do with information disclosure!

5. CFS021002HK-ZWE391-ql
Model Specification
When conducing cross-sectional analysis, should Post-FD dummies interact with other explanatory variables?
Only including the Post-FD dummy leads to the suspicion that it only picks up time-series variation

6. Cross Sectional Variations
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Cross Sectional Variations
The paper examines the post-FD cost of capital reduction across five firm-specific variables --- book-to-market, R&D expenditure, Institutional holdings, transient institutional holdings, non-transient institutional holdings
As a paper about information disclosure, I would like to argue some other cross-firm attributes might be more appropriate --- corporate governance level, probability of information based trading (PIN) before Reg. FD, financial analyst coverage, etc.

7. CFS021002HK-ZWE391-ql
Thanks