Information Complementarities and the Dynamics of Transparency Shock Spillovers
60 Pages Posted: 1 Mar 2021 Last revised: 2 Sep 2021
Date Written: December 26, 2020
We show that information complementarities play an important role in the spillover of transparency shocks. We exploit staggered revelation of financial misconduct by S&P500 firms and find that the implied cost of capital increases for “close” industry peers relative to “distant” peers. Disclosure also increases. The effects are particularly strong when the close peers share common analysts and institutional ownership with the fraudulent firm. While disclosure remains high for the next four years, with sustained disclosure, the cost of equity starts to decrease. Firms’ financing patterns tilt more towards debt financing initially at the expense of equity, but eventually revert.
Keywords: Cost of equity, Disclosure, Transparency, Information Environment, Information Complementarity
JEL Classification: G14, G30, M41
Suggested Citation: Suggested Citation