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| Firm Specific Information and the Cost of Equity Capital by Philip G. Berger of the University of Chicago, January 7, 2006 Abstract: We develop a comprehensive and large-sample measure of a firm's information quality. The measure is the ratio of firm-specific return variation to firm-specific cash-flow variation. Empirical evidence supports the validity of our measure. Using this measure, we find that cost of equity capital decreases by about -0.4% on an annual basis if a firm's information quality increases by one standard deviation. This is consistent with the joint hypotheses that (1) firm-specific stock returns contain economic information as argued by Morck, Yeung, and Yu (2000) and (2) better information quality can lower the cost of equity. Download paper (203K PDF) 36 pages [Home] [Papers Related to Credit]  |
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