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http://ssrn.com/abstract=1676023
 
 

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Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location


Sadok El Ghoul


University of Alberta - Campus Saint-Jean

Omrane Guedhami


University of South Carolina - Moore School of Business

Yang Ni


Shanghai Jiao Tong University (SJTU)

Jeffrey Pittman


Memorial University of Newfoundland (MUN) - Faculty of Business Administration

Samir Saadi


Queen's School of Business

September 12, 2010

Contemporary Accounting Research, Forthcoming

Abstract:     
The scarcity of suitable proxies for asymmetric information has impeded empirical research from providing reliable evidence on whether information risk shapes equity pricing. In re-examining this unresolved question, we rely on firms’ geographic distance from financial centers to gauge information asymmetry. We provide strong, robust evidence supporting the prediction that equity financing is cheaper for firms nearer central locations, implying that investors rationally require more compensation when information asymmetry is worse. The equity pricing role of geographic proximity is economically large with our coefficient estimates translating into firms located within 100 kilometers of the city center of the nearest of six major financial centers, or in their metropolitan statistical areas, enjoying equity financing costs that are 7 basis points lower. Our inferences are insensitive to measuring both the cost of equity capital and distance in several ways, controlling for corporate governance quality, and addressing endogeneity. Collectively, our analysis suggests that investors discount the price that they pay for their securities to reflect the greater information asymmetry that ensues when firms are far from major financial centers.

Number of Pages in PDF File: 66

Keywords: Cost of equity capital, information asymmetry, geography location

JEL Classification: G10, G14, G34, G39

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Date posted: September 13, 2010 ; Last revised: November 13, 2011

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Ni, Yang and Pittman, Jeffrey and Saadi, Samir, Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location (September 12, 2010). Contemporary Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1676023

Contact Information

Sadok El Ghoul (Contact Author)
University of Alberta - Campus Saint-Jean ( email )
Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)
Omrane Guedhami
University of South Carolina - Moore School of Business ( email )
Columbia, SC
United States
Yang Ni
Shanghai Jiao Tong University (SJTU) ( email )
KoGuan Law School
Shanghai 200030, Shanghai 200052
China
Jeffrey A. Pittman
Memorial University of Newfoundland (MUN) - Faculty of Business Administration ( email )
St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)
Samir Saadi
Queen's School of Business ( email )
Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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