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Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location

66 Pages Posted: 13 Sep 2010 Last revised: 12 Oct 2015

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Yang Ni

Shanghai Jiao Tong University (SJTU)

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Samir Saadi

Queen's School of Business

Date Written: September 12, 2010

Abstract

The scarcity of suitable proxies for asymmetric information has impeded empirical research from providing reliable evidence on whether information risk shapes equity pricing. In re-examining this unresolved question, we rely on firms’ geographic distance from financial centers to gauge information asymmetry. We provide strong, robust evidence supporting the prediction that equity financing is cheaper for firms nearer central locations, implying that investors rationally require more compensation when information asymmetry is worse. The equity pricing role of geographic proximity is economically large with our coefficient estimates translating into firms located within 100 kilometers of the city center of the nearest of six major financial centers, or in their metropolitan statistical areas, enjoying equity financing costs that are 7 basis points lower. Our inferences are insensitive to measuring both the cost of equity capital and distance in several ways, controlling for corporate governance quality, and addressing endogeneity. Collectively, our analysis suggests that investors discount the price that they pay for their securities to reflect the greater information asymmetry that ensues when firms are far from major financial centers.

Keywords: Cost of equity capital, information asymmetry, geography location

JEL Classification: G10, G14, G34, G39

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Ni, Yang and Pittman, Jeffrey and Saadi, Samir, Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location (September 12, 2010). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1676023

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Yang Ni

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Samir Saadi

Queen's School of Business ( email )

Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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