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When Does Information Asymmetry Affect the Cost of Capital?

Author(s)
Armstrong, Christopher S.; Core, John E.; Taylor, Daniel J.; Verrecchia, Robert E.
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Abstract
This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.
Date issued
2011-01
URI
http://hdl.handle.net/1721.1/68635
Department
Sloan School of Management
Journal
Journal of Accounting Research
Publisher
University of Chicago on behalf of the Accounting Research Center
Citation
Armstrong, Christopher S. et al. “When Does Information Asymmetry Affect the Cost of Capital?” Journal of Accounting Research 49.1 (2011): 1-40.
Version: Author's final manuscript
ISSN
0021-8456
1475-679X

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