34 Pages Posted: 8 Jun 2006 Last revised: 18 Sep 2012
Date Written: September 14, 2012
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: Suggested Citation
Berger, Philip G. and Chen, Huafeng (Jason) and Li, Feng, Firm Specific Information and the Cost of Equity Capital (September 14, 2012). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=906152 or http://dx.doi.org/10.2139/ssrn.906152