Expecting the unexpected: Voluntary sensitivity risk disclosure and the cost of equity capital

This paper studies the empirical implications of voluntary sensitivity risk disclosures for firms' cost of equity capital in the context of UK corporate pension plans. We document the practice of voluntary risk disclosure in the form of sensitivities of defined benefit obligations (DBO) to discount rate assumptions using hand-collected data for a sample of FTSE 350 firms that sponsor defined benefit pension plans. We show that, despite investors' ability to estimate DBO sensitivities using known firm and pension plan characteristics, the market lowers the required return of disclosing firms. Cross-sectional analyses demonstrate that this reduction in the cost of equity capital is consistent with an information precision effect. Results are robust to alternative specifications and multiple checks.