Abstract

http://ssrn.com/abstract=936429
 
 

Citations (34)



 


 



Information Asymmetry, Information Precision, and the Cost of Capital


Richard A. Lambert


University of Pennsylvania - Accounting Department

Christian Leuz


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Robert E. Verrecchia


University of Pennsylvania - Accounting Department

March 1, 2008

Review of Finance, 2011
Wharton Financial Institutions Center Working Paper No. 06-21

Abstract:     
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average information precision effect is unlikely to diversify away when there exist many firms whose cash flows covary. Thus, better disclosure can reduce a firm's cost of capital. Third, the precision effect does not give rise to a separate information risk factor. These points are important to empirical research in financial economics, as well as to regulators who debate future disclosure requirements and the consequences of prior requirements such as Regulation Fair Disclosure.

Number of Pages in PDF File: 42

Keywords: Information risk, Cost of capital, Expected return, Asset pricing, Disclosure, Rational expectations, Diversification

JEL Classification: G12, M41, D82

working papers series





Download This Paper

Date posted: October 11, 2006 ; Last revised: November 25, 2011

Suggested Citation

Lambert, Richard A. and Leuz, Christian and Verrecchia, Robert E., Information Asymmetry, Information Precision, and the Cost of Capital (March 1, 2008). Review of Finance, 2011; Wharton Financial Institutions Center Working Paper No. 06-21. Available at SSRN: http://ssrn.com/abstract=1113649 or http://dx.doi.org/10.2139/ssrn.1113649

Contact Information

Richard Lambert
University of Pennsylvania - Accounting Department ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7782 (Phone)
215-573-5463 (Fax)

Christian Leuz
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)
HOME PAGE: http://chicagobooth.edu/fac/christian.leuz
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org
European Corporate Governance Institute (ECGI)
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Center for Financial Studies (CFS) ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
University of Pennsylvania - Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6218
United States
CESifo Research Network
Poschinger Str. 5
Munich, DE-81679
Germany
Robert E. Verrecchia (Contact Author)
University of Pennsylvania - Accounting Department ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

Feedback to SSRN


Paper statistics
Abstract Views: 6,260
Downloads: 2,638
Download Rank: 2,139
References:  41
Citations:  48
Footnotes:  17

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.343 seconds