Firm Specific Information and the Cost of Equity Capital
34 Pages Posted: 8 Jun 2006 Last revised: 16 Apr 2018
Date Written: April 2, 2018
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
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