A Note on Information and the Cost of Capital: The Easley-O’Hara (2004) Model with Endogenous Information Acquisition

Abstract

We investigate the impact of endogenous information acquisition on Easley and O’Hara’s (2004) result that moving information from being publicly to privately available results in an increase in a firm’s cost of capital. As in Christensen, de la Rosa and Feltham (2010), when the cost of information acquisition is fixed, Easley and O’Hara’s result reverses. We study two scenarios, however, where Easley and O’Hara’s result can continue to hold: (i) where the cost of information acquisition is increasing in its precision, and (ii) where the benefits of acquiring private information span multiple firms.

Keywords: cost of capital, endogenous information acquisition

JEL Classification: M41