Information Risk and the Cost of Capital: Review of the Empirical Literature

Abstract:     
The purpose of this paper is to synthesize the empirical research on the relationship between information risk and the cost of capital. Although theory suggests that, increase in information should reduce the cost of capital through reduced transaction cost and/or reduced estimation risk, traditional asset pricing model does not allow any role for information. This survey documents recent development in the measurement of cost of equity capital and how this is affected by the quality of information disclosed. The empirical literature on the effect of disclosure quality, earnings quality and corporate governance risk on the cost of capital is synthesized. The survey shows that considerable progress has been made in understanding the role of information in influencing the cost of capital, however, more research needs to be done and these are identified.

Number of Pages in PDF File: 37

Keywords: Cost of capital, disclosure quality, financial reporting quality, corporate governance risk

JEL Classification: G12, G14, G30, M41

working papers series