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File name: SSRN-id1714032. ; Size: 315K
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When Does Information Asymmetry Affect the Cost of Capital?
Chris Armstrong
University of Pennsylvania - Accounting Department
John E. Core
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Daniel J. Taylor
University of Pennsylvania - The Wharton School
Robert E. Verrecchia
University of Pennsylvania - Accounting Department
October 24, 2010
Journal of Accounting Research, Forthcoming
Abstract:
This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.
Number of Pages in PDF File: 56
Keywords: information asymmetry, cost of capital, market competition, expected returns
Accepted Paper Series
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Date posted: October 25, 2010
; Last revised: November 26, 2011
Suggested CitationArmstrong, Chris S., Core, John E., Taylor, Daniel J. and Verrecchia, Robert E., When Does Information Asymmetry Affect the Cost of Capital? (October 24, 2010). Journal of Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1697344
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