Information and the Cost of Capital

David Easley () and Maureen O'hara

Journal of Finance, 2004, vol. 59, issue 4, pages 1553-1583

Abstract: We investigate the role of information in affecting a firm's cost of capital. We show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio to incorporate new information, and uninformed investors are thus disadvantaged. In equilibrium, the quantity and quality of information affect asset prices. We show firms can influence their cost of capital by choosing features like accounting treatments, analyst coverage, and market microstructure. Copyright 2004 by The American Finance Association.

Date: 2004
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