Biopharmaceutical and chemical firms’ R&D disclosure, and cost of equity: The impact of the regulatory regime

• The quantity of disclosure of R&D activity is significantly influenced by the level of regulation.
• A stronger regulatory regime on R&D disclosure enhances the quantity of information disclosed.
• There is a high direct statistical significance between the cost of capital and the amount of R&D information.
• Statistical significance of our results differs in relation to the type of R&D information disclosed.

Based on the proprietary costs theory, this paper aims to survey whether the regulatory regime (mandatory versus voluntary) of research and development (R&D) narrative disclosures impacts, by the means of a reduced information asymmetry, on the cost of equity capital. In order to construct a disclosure index to investigate the extent and the comprehensiveness of R&D information, the methodology adopted was the content analysis of 77 biopharmaceutical and chemical listed companies’ management reports from eight Western European countries across the period 2005–2009. Hence, we obtained an (unbalanced) panel data of 309 observations. The cost of capital has subsequently been regressed on the disclosure index. Results confirm a larger amount of R&D disclosures whereas information is more regulated, but they do not confirm an inverse relation with the cost of capital.