Accounting Papers

Document Type

Journal Article

Date of this Version

2012

Publication Source

Review of Finance

Volume

16

Issue

1

Start Page

1

Last Page

29

DOI

10.1093/rof/rfr014

Abstract

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.

Copyright/Permission Statement

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

Keywords

cost of capital, disclosure, information risk, asset pricing

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Date Posted: 27 November 2017

This document has been peer reviewed.