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http://ssrn.com/abstract=906152
 
 

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Firm Specific Information and the Cost of Equity Capital


Philip G. Berger


University of Chicago - Booth School of Business

Huafeng (Jason) Chen


Texas A&M University

Feng Li


University of Michigan, Stephen M. Ross School of Business

September 14, 2012

EFA 2006 Zurich Meetings

Abstract:     
We develop a comprehensive and large-sample measure of a firm's information quality. The measure is the ratio of firm-specific return variation to firm-specific cash-flow variation. Empirical evidence supports the validity of our measure. Using this measure, we find that cost of equity capital decreases by about 0.4% on an annual basis if a firm's information quality increases by one standard deviation. This is consistent with the joint hypotheses that (1) firm-specific stock returns contain economic information as argued by Morck, Yeung, and Yu (2000) and (2) better information quality can lower the cost of equity.

Number of Pages in PDF File: 34

Keywords: information quality, the cost of equity capital, firm-specific information

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Date posted: June 8, 2006 ; Last revised: September 18, 2012

Suggested Citation

Berger, Philip G. and Chen, Huafeng (Jason) and Li, Feng, Firm Specific Information and the Cost of Equity Capital (September 14, 2012). EFA 2006 Zurich Meetings. Available at SSRN: http://ssrn.com/abstract=906152 or http://dx.doi.org/10.2139/ssrn.906152

Contact Information

Philip G. Berger (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)
Huafeng (Jason) Chen
Texas A&M University ( email )
430 Wehner
College Station, TX 77843-4218
United States
Feng Li
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
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