Date of this Version
Review of Finance
This paper examines the relation between information differences across investors (i.e., information asymmetry) and the cost of capital and establishes that with perfect competition information asymmetry makes no difference. Instead, a firm’s cost of capital is governed solely by the average precision of investors’ information. With imperfect competition, however, information asymmetry affects the cost of capital even after controlling for investors’ average precision. In other words, the capital market’s degree of competition plays a critical role for the relation between information asymmetry and the cost of capital. This point is important to empirical research in finance and accounting.
This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record is available online at: http://dx.doi....93/rof/rfr014
cost of capital, disclosure, information risk, asset pricing
Lambert, R. A., Leuz, C., & Verrecchia, R. E. (2012). Information Asymmetry, Information Precision, and the Cost of Capital. Review of Finance, 16 (1), 1-29. http://dx.doi.org/10.1093/rof/rfr014
Date Posted: 27 November 2017
This document has been peer reviewed.