Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature

TY - JOUR

T1 - Idiosyncratic information and the cost of equity capital

T2 - A meta-analytic review of the literature

AU - Schreder, Max

PY - 2018/12

Y1 - 2018/12

N2 - This paper provides a quantitative review of the literature on the repercussions of idiosyncratic information on firms’ cost of equity (CoE) capital. In total, I reconsider the results of 113 unique studies examining the CoE effects of information Quantity, Precision and Asymmetry. My results suggest that the association between firm-specific information and CoE is subject to moderate effects. First, the link between Quantity and CoE is moderated by disclosure types and country-level factors in that firms in comparatively weakly regulated countries tend to enjoy up to four times greater CoE benefits from more expansive disclosure—depending on the type of disclosure—than firms in strongly regulated markets. Second, a negative relationship between Precision and CoE is only significant in studies using non-accrual quality proxies for Precision and risk factor-based (RFB)/valuation model-based (VMB) proxies for CoE. Third, almost all VMB studies confirm the positive association between Asymmetry and CoE, but there is notable variation in the conclusions reached when ex post CoE measurers are used.

AB - This paper provides a quantitative review of the literature on the repercussions of idiosyncratic information on firms’ cost of equity (CoE) capital. In total, I reconsider the results of 113 unique studies examining the CoE effects of information Quantity, Precision and Asymmetry. My results suggest that the association between firm-specific information and CoE is subject to moderate effects. First, the link between Quantity and CoE is moderated by disclosure types and country-level factors in that firms in comparatively weakly regulated countries tend to enjoy up to four times greater CoE benefits from more expansive disclosure—depending on the type of disclosure—than firms in strongly regulated markets. Second, a negative relationship between Precision and CoE is only significant in studies using non-accrual quality proxies for Precision and risk factor-based (RFB)/valuation model-based (VMB) proxies for CoE. Third, almost all VMB studies confirm the positive association between Asymmetry and CoE, but there is notable variation in the conclusions reached when ex post CoE measurers are used.

KW - meta-analysis

KW - idiosyncratic information

KW - information risk

KW - expected returns

KW - cost of equity capital

KW - implied cost of capital

U2 - 10.1016/j.acclit.2018.07.001

DO - 10.1016/j.acclit.2018.07.001

M3 - Article

SN - 0737-4607

VL - 41

SP - 142

EP - 172

JO - Journal of Accounting Literature

JF - Journal of Accounting Literature

ER -