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When Does the Peer Information Environment Matter?

68 Pages Posted: 27 Mar 2017  

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Benjamin P. Yost

Boston College - Carroll School of Management

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Date Written: March 27, 2017

Abstract

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: Peer effects, Externalities, Disclosure, Cost of capital, Information asymmetry, IPOs, SEOs, Bonds, Dynamic effects

JEL Classification: D8; D62; G18; G31; G38; M4

Suggested Citation

Shroff, Nemit and Verdi, Rodrigo S. and Yost, Benjamin P., When Does the Peer Information Environment Matter? (March 27, 2017). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2941465

Nemit Shroff (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main St.
E62-679
Cambridge, MA MA 02142
United States
6173240805 (Phone)

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

Benjamin P. Yost

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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