Firm Specific Information and the Cost of Equity Capital

34 Pages Posted: 8 Jun 2006 Last revised: 16 Apr 2018

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago - Chookaszian Accounting Research Center

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Date Written: April 2, 2018

Abstract

We develop a comprehensive and large-sample measure of a firm's information quality. The measure is the ratio of firm-specific return variation to firm-specific cash-flow variation. Empirical evidence supports the validity of our measure. Using this measure, we find that cost of equity capital decreases by about 0.4% on an annual basis if a firm's information quality increases by one standard deviation. This is consistent with the joint hypotheses that (1) firm-specific stock returns contain economic information as argued by Morck, Yeung, and Yu (2000) and (2) better information quality can lower the cost of equity.

Keywords: information quality, the cost of equity capital, firm-specific information

Suggested Citation

Berger, Philip G. and Chen, Huafeng (Jason) and Li, Feng, Firm Specific Information and the Cost of Equity Capital (April 2, 2018). Available at SSRN: https://ssrn.com/abstract=906152 or http://dx.doi.org/10.2139/ssrn.906152

Philip G. Berger (Contact Author)

University of Chicago - Chookaszian Accounting Research Center ( email )

1101 East 58th Street
Chicago, IL 60637-1561
United States

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China