Information Quality and the Expected Rate of Return: A Structural Equation Modelling Approach

Max Schreder () and Pawel Bilinski
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Max Schreder: University of London
Pawel Bilinski: City, University of London

Asia-Pacific Financial Markets, 2022, vol. 29, issue 2, No 1, 139-170

Abstract: Abstract We use structural equation modelling for a robust test of the role information quality plays in explaining the cost of equity capital (CoE). SEM allows us to reliably identify the direct and indirect effects that three information quality attributes, quantity, asymmetry and precision, have on CoE. The method also reduces the error-in-variables problem, which stems from selectivity in proxies for information quality and CoE. Using nine proxies to capture the variation in information quality attributes and nine CoE measures, we document that the direct effects of precision and asymmetry are equally important in explaining variation in CoE, while quantity has a negative direct effect. Quantity has a positive indirect effect on CoE mediated through asymmetry and precision. The strength of the relations we identify varies according to firm size, maturity, profitability and with proxies for CoE, which suggests that sample compositions and measurement choices affect the power of tests. Our results consolidate mixed evidence on the relation between information quality and CoE that is often based on a single measure of information quality and ignores indirect channels.

Keywords: Cost of equity; Implied cost of capital; Information risk; Information quality; Structural equation modelling (search for similar items in EconPapers)
JEL-codes: G12 G14 G31 M41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10690-021-09342-8

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