 Impact of investor trust on public firms’ stock price efficiency and cost of capital: Insights from a firm-level measure for investor trustLin Lin, Ngou Teng Pun and Ping-Wen Sun Economic Modelling, 2024, vol. 138, issue C Abstract: Although studies have suggested that investor trust positively influences stock price efficiency and subsequently reduces the cost of capital for public firms, few studies have employed a direct firm-level measure of investor trust to offer empirical support for this proposition. Because stock prices are more efficient surrounding earnings announcements, we construct this measure by examining how prices change when unexpected earnings reports are provided. Using US market data from 1990 to 2019 to determine how strongly investor trust affects public firms’ stock price efficiency and cost of capital, we find that stock prices of firms with higher investor trust reflect market news more efficiently and predict earnings more accurately. Furthermore, our results suggest that companies trusted more by investors can raise money more cheaply. Collectively, our findings underscore the importance of fostering investor trust as a means of enhancing stock price efficiency and reducing the cost of capital. Keywords: Investor trust; Earnings announcement; Standardized unexpected earnings; Accounting quality; Price efficiency (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:138:y:2024:i:c:s0264999324001421 DOI: 10.1016/j.econmod.2024.106786 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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