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Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/229713
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- Title
- Information asymmetry and the cost of equity capital
- Related
- International review of economics and finance, Vol. 27, (2013), p.611-620
- DOI
- 10.1016/j.iref.2013.03.001
- Publisher
- Elsevier BV
- Date
- 2013
- Author/Creator
- He, William Peng
- Author/Creator
- Lepone, Andrew
- Author/Creator
- Leung, Henry
- Description
- 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.
- Description
- 10 page(s)
- Subject Keyword
- 140200 Applied Economics
- Subject Keyword
- Analyst forecast
- Subject Keyword
- Cost of capital
- Subject Keyword
- Information asymmetry
- Resource Type
- journal article
- Organisation
- Macquarie University. Macquarie Graduate School of Management
- Identifier
- http://hdl.handle.net/1959.14/229713
- Identifier
- mq:27162
- Identifier
- ISSN:1059-0560
- Identifier
- mq-rm-2011015152
- Identifier
- mq_res-ext-2-s2.0-84876345865
- Language
- eng
- Reviewed
Macquarie University ResearchOnline
