Disaggregated information asymmetry and precision: the effect on cost of capital

• In Event: Corporate Governance and Organizational Issues in Financial Accounting

Abstract

In this paper I consider the effect of information asymmetry and precision in revenue and expenses on firms’ cost of capital. Using analysts’ revenue and EPS forecasts along with analysts’ implied expense forecasts, I construct information asymmetry and precision proxies using the decomposition methods of Barron et al. (1998). Multivariate regressions show that expense private information (average information precision) is associated with higher (lower) equity cost of capital. However, revenue private information and average information precision are not consistently related to cost of capital. Further results indicate that both expense public and private information precision are negatively associated with cost of capital but private revenue information precision is positively associated with cost of capital. These results hold conditional on earnings public and private information precision. Finally, I find that the results are stronger for smaller firms and firms that are expected to have high earnings growth.

Author

• Thaddeus Andrew Neururer, Boston University