Information and the Cost of Capital: An Ex-Ante Perspective

Posted: 16 May 2008 Last revised: 25 Dec 2013

See all articles by Peter O. Christensen

Peter O. Christensen

Copenhagen Business School - Department of Finance

Leonidas Enrique de la Rosa

Aarhus University - Department of Economics and Business Economics

Gerald A. Feltham

University of British Columbia

Date Written: May 15, 2008

Abstract

The relationship between the informational environment and the cost of equity capital has received considerable interest in finance and accounting research as well as in financial reporting regulation. Recent papers have demonstrated that increased public disclosure may decrease firms' cost of capital, at least if the additional information pertains to systematic risk. The discussion has focused on the impact of information on the cost of capital subsequent to the release of the information (the ex-post cost of capital). We show that the reduction in the ex-post cost of capital is offset by an equal increase in the cost of capital for the period leading up to the release of the information (the preposterior cost of capital). Thus, within the class of models framing the recent discussion, there is no impact on the ex-ante cost of capital covering the full time span of the firm. The extent to which information is made publicly or privately available affects the timing of the resolution of uncertainty and when the information is reflected in equilibrium prices, but there is no impact on initial equilibrium prices.

In efficient economies with only public information, there is no impact of the information system choice on the investors' ex-ante expected utilities either. In the partially revealing rational expectations equilibrium of an economy with private investor information, however, the rational investors may actually benefit from a higher ex-post cost of capital (at the expense of the liquidity traders).

JEL Classification: G12, M41, M45

Suggested Citation

Christensen, Peter Ove and de la Rosa, Leonidas Enrique and Feltham, Gerald A., Information and the Cost of Capital: An Ex-Ante Perspective (May 15, 2008). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1133604 or http://dx.doi.org/10.2139/ssrn.1133604

Peter Ove Christensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark
+45 6140 3237 (Phone)

Leonidas Enrique De la Rosa

Aarhus University - Department of Economics and Business Economics ( email )

Fuglesangs Alle 4
Aarhus, 8210
Denmark

Gerald A. Feltham

University of British Columbia ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8397 (Phone)
604-822-9470 (Fax)

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