Institutional Investors, Private Information, and the Cost of Capital

2012 Financial Management Association (FMA) European Conference, Istanbul

Posted: 15 Dec 2011 Last revised: 13 Apr 2019

See all articles by Hoang Luong

Hoang Luong

The University of Queensland - UQ Business School

Lily Nguyen

The University of Queensland - UQ Business School

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: December 14, 2011

Abstract

We study the relation between institutional shareholdings, private information in stock prices and the cost of capital. Using the probability of informed trading as a proxy for private information, we find that institutional ownership reduces private information in stock prices, and firms with high private information faces a higher cost of capital compared to those with low private information. More importantly, we find that the effect of private information on the cost of capital becomes insignificant for firms that have high institutional ownership. Our findings imply that investors do not require a higher rate of risk-adjusted return for private information risks when holding stocks of firms with high institutional ownership.

Keywords: Institutional Ownership, Informed Trading, Private Information, Cost of Capital

JEL Classification: G14, G32, G34

Suggested Citation

Luong, Hoang and Nguyen, Lily and Yin, Xiangkang, Institutional Investors, Private Information, and the Cost of Capital (December 14, 2011). 2012 Financial Management Association (FMA) European Conference, Istanbul. Available at SSRN: https://ssrn.com/abstract=1972657 or http://dx.doi.org/10.2139/ssrn.1972657

Hoang Luong

The University of Queensland - UQ Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Lily Nguyen (Contact Author)

The University of Queensland - UQ Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Xiangkang Yin

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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