Accounting Papers

Document Type

Journal Article

Date of this Version

3-2011

Publication Source

Journal of Accounting Research

Volume

49

Issue

1

Start Page

1

Last Page

40

DOI

10.1111/j.1475-679X.2010.00391.x

Abstract

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.

Copyright/Permission Statement

This is the peer reviewed version of the following article: ARMSTRONG, C. S., CORE, J. E., TAYLOR, D. J. and VERRECCHIA, R. E. (2011), When Does Information Asymmetry Affect the Cost of Capital?. Journal of Accounting Research, 49: 1–40., which has been published in final form at dx.doi.org10.1111/j.1475-679X.2010.00391.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms.

Keywords

information asymmetry, cost of capital, market competition, expected returns

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Date Posted: 27 November 2017

This document has been peer reviewed.