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Information Environment and the Cost of Capital: A New Approach

Author

Listed:
  • Xuguang Sheng
  • Orie Barron
  • Maya Thevenot

Abstract

Sheng and Thevenot (2011) develop a new measure of uncertainty which is a modification of the uncertainty measure advanced by Barron, Kim, Lim and Stevens (BKLS 1998), and they find this new uncertainty measure to be superior to the BKLS measure in certain settings. We follow Sheng and Thevenot's suggestion for modifying other measures of the information environment, and we demonstrate that our new measures are superior in another setting. We also find that cost of equity capital increases greatly with our new measures of information asymmetry and average information precision even after controlling for the level of market competition. Our regression estimates suggest that information asymmetry and average information precision are more important factors than equity beta and firm size in determining firms' cost of capital, and that the seemingly great importance of these new measures is not apparent using the prior BKLS measures of information asymmetry and precision.

Suggested Citation

  • Xuguang Sheng & Orie Barron & Maya Thevenot, 2012. "Information Environment and the Cost of Capital: A New Approach," Working Papers 2012-12, American University, Department of Economics.
    • Handle: RePEc:amu:wpaper:2012-12
    DOI: 10.17606/8y8r-1225
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    File URL: https://doi.org/10.17606/8y8r-1225
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    References listed on IDEAS

    as
    1. Christopher S. Armstrong & John E. Core & Daniel J. Taylor & Robert E. Verrecchia, 2011. "When Does Information Asymmetry Affect the Cost of Capital?," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 1-40, March.
    2. Ng, Jeffrey, 2011. "The effect of information quality on liquidity risk," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 126-143.
    3. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    4. Orie E. Barron & Mary Harris Stanford & Yong Yu, 2009. "Further Evidence on the Relation between Analysts' Forecast Dispersion and Stock Returns," Contemporary Accounting Research, John Wiley & Sons, vol. 26(2), pages 329-357, June.
    5. Sheng, Xuguang & Thevenot, Maya, 2012. "A new measure of earnings forecast uncertainty," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 21-33.
    6. Barth, Mary E. & Konchitchki, Yaniv & Landsman, Wayne R., 2013. "Cost of capital and earnings transparency," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 206-224.
    7. repec:bla:jfinan:v:59:y:2004:i:4:p:1553-1583 is not listed on IDEAS
    8. Christine A. Botosan & Marlene A. Plumlee & HE Wen, 2011. "The Relation between Expected Returns, Realized Returns, and Firm Risk Characteristics," Contemporary Accounting Research, John Wiley & Sons, vol. 28(4), pages 1085-1122, December.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Aabo, Tom & Pantzalis, Christos & Park, Jung Chul, 2015. "Multinationality and opaqueness," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 65-84.

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    More about this item

    Keywords

    cost of capital; information quality; information asymmetry; ST uncertainty; BKLS;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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