Firm Specific Information and the Cost of Equity Capital

34 Pages Posted: 8 Jun 2006 Last revised: 18 Sep 2012

Philip G. Berger

University of Chicago - Booth School of Business

Huafeng (Jason) Chen

Tsinghua University - PBC School of Finance

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Date Written: September 14, 2012

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 (September 14, 2012). EFA 2006 Zurich Meetings. 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 - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)

Huafeng (Jason) Chen

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Feng Li

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

211 West Huaihai Road
Shanghai, Shanghai 200030
China

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