Information and the Cost of Capital

44 Pages Posted: 17 Feb 2002

See all articles by Maureen O'Hara

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Date Written: November, 2001

Abstract

We investigate the role of information in affecting a firm's cost of capital. Using a multi-asset rational expectations model, we show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio weights to incorporate new information, and uninformed investors are thus disadvantaged. The model demonstrates how in equilibrium the quantity and quality of information affect asset prices, resulting in cross-sectional differences in firms' required returns. We show how a firm can influence its cost of capital by choosing features like accounting treatments, financial analyst coverage, and market microstructure.

JEL Classification: G3, G12, D82

Suggested Citation

O'Hara, Maureen and Easley, David, Information and the Cost of Capital (November, 2001). EFA 2002 Berlin Meetings Presented Paper; Cornell University Johnson Graduate School of Management Working Paper. Available at SSRN: https://ssrn.com/abstract=300715 or http://dx.doi.org/10.2139/ssrn.300715

Maureen O'Hara (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
3,158
Abstract Views
12,379
rank
3,281
PlumX Metrics