Information and the Cost of Capital

TLDR

In equilibrium, the quantity and quality of information affect asset prices. The study investigates how information influences a firm's cost of capital. Informed investors can shift portfolios to incorporate new information, disadvantaging uninformed investors and raising the required return. Differences between public and private information raise the cost of capital, and firms can influence it through accounting treatments, analyst coverage, and market microstructure.

Abstract

ABSTRACT We investigate the role of information in affecting a firm's cost of capital. We show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio to incorporate new information, and uninformed investors are thus disadvantaged. In equilibrium, the quantity and quality of information affect asset prices. We show firms can influence their cost of capital by choosing features like accounting treatments, analyst coverage, and market microstructure.