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Information and the Cost of Capital
Author(s) -
Easley David,
O'hara Maureen
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00672.x
Subject(s) - cost of capital , affect (linguistics) , business , private information retrieval , portfolio , disadvantaged , information quality , asset (computer security) , public information , capital (architecture) , capital asset pricing model , capital market , economics , monetary economics , microeconomics , finance , information system , incentive , philosophy , mathematics , computer security , public administration , history , economic growth , linguistics , archaeology , computer science , engineering , political science , statistics , electrical engineering
We investigate the role of information in affecting a firm's cost of capital. We show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio to incorporate new information, and uninformed investors are thus disadvantaged. In equilibrium, the quantity and quality of information affect asset prices. We show firms can influence their cost of capital by choosing features like accounting treatments, analyst coverage, and market microstructure.