68 Pages Posted: 4 Mar 2016 Last revised: 26 Mar 2017
Date Written: February 24, 2017
This paper examines whether the information environment of peer firms affects the cost of capital for related firms in an industry and whether this effect changes over time. We focus on private firms that raise public capital for the first time because such firms are opaque prior to their capital issuance but become significantly more transparent following their issuance. We predict and find that in the initial year of capital issuance, when information about the capital raising firm is scarce, peer information is negatively associated with the issuing firm’s cost of capital. This effect shrinks over time as the amount of publicly available information about the firm increases and substitutes for peer information. In economic terms, peer information lowers bond yield spreads (equity bid-ask spreads) by 17% (4%) for first-time issuers in the year of issuance and by 3% (0.8%) in the third year after issuance. This paper provides evidence that the positive externalities arising from information about peer firms vary over time.
Keywords: Disclosure; Externalities; Regulation; Cost of Capital; Financial Accounting; Bonds; IPOs; SEOs
Suggested Citation: Suggested Citation
Shroff, Nemit and Verdi, Rodrigo S. and Yost, Benjamin P., When Does the Peer Information Environment Matter? (February 24, 2017). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2741231 or http://dx.doi.org/10.2139/ssrn.2741231