 Information asymmetry and the cost of equity capitalWilliam Peng He, Andrew Lepone () and Henry Leung International Review of Economics & Finance, 2013, vol. 27, issue C, 611-620 Abstract: This study examines the relation between information asymmetry and the cost of equity capital of firms listed on the Australian Securities Exchange. We calculate the ex ante cost of equity capital for constituent companies of the S&P/ASX 200 Index. The bid–ask spread of the companies is decomposed to find the adverse selection component, which is used to measure the information asymmetry of the company. We control for factors generally known to influence the required return on equity, such as sector, beta, firm size, book-to-market, analyst coverage and analyst earnings forecast dispersion. This study documents a significant and positive relation between information asymmetry and ex ante investor's required rate of return. We also find that earnings forecast dispersion increases ex ante cost of equity capital, while analyst coverage tends to decrease the return required by investors. This is consistent with the expectation that cost of capital increases with higher levels of information uncertainty and asymmetry. Keywords: Information asymmetry; Cost of capital; Analyst forecast (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:reveco:v:27:y:2013:i:c:p:611-620 DOI: 10.1016/j.iref.2013.03.001 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.