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Information Asymmetry, Diversification, and Cost of Capital by John S. Hughes; Jing Liu; Jun Liu is a Business, Management and Accounting article available to read on EtoBox.
What is Information Asymmetry, Diversification, and Cost of Capital about?
Recently, there has been considerable interest among accounting researchers in the relation between asymmetric information and cost of capital. A number of empirical studies document associations between risk premiums and proxies for asymmetric information such as earnings quality. However, the theoretical foundation for these studies has yet to be fully established. In this study, we consider the effects of private signals that are informative of both systematic factors and idiosyncratic shocks affecting asset payoffs in a competitive, noisy, rational expectations setting. Taking a large economy limit, we show that (1) risk premiums equal products of betas and factor risk premiums, irrespective of information asymmetries; (2) holding total information constant, greater information asymmetry leads to higher factor risk premiums and, thus, higher costs of capital; and (3) controlling for betas, there is no cross-sectional effect of information asymmetries on cost of capital. These results provide guidance in interpreting the findings of existing empirical work and suggest specifications helpful for future research.
Who reads Information Asymmetry, Diversification, and Cost of Capital?
It is typically read by researchers, students, and practitioners in Business, Management and Accounting.
- Author
- John S. Hughes; Jing Liu; Jun Liu
- Publisher
- American Accounting Association
- Published
- 2007
- Language
- EN
- Field
- Business, Management and Accounting (Social Sciences)