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
Shanghai Advanced Institute of Finance, Shanghai Jiaotong University
September 14, 2012
EFA 2006 Zurich Meetings
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
Date posted: June 8, 2006 ; Last revised: September 18, 2012
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