AbstractThis thesis is situated at the interface between asset pricing and market microstructure theory. Motivated by seminal work of David Easley and Maureen O’Hara (2004), who present a cohesive framework in which idiosyncratic information impact firms’ cost of equity, I contribute three interrelated research papers to this stream of research. My first paper “Idiosyncratic Information and Expected Rate of Returns: A Meta-Analytic Review of the Literature” provides a quantitative review of the literature examining the associa-tion between firm-specific information and expected rate of returns. Findings therein mo-tivate my other two empirical papers.
My second paper “The Impact of Idiosyncratic Information on Expected Rate of Re-turns: A Structural Equation Modelling Approach” relates to work which tests the empir-ical validity of information-based return models and examines the question as to what extent a firm’s information environment affects its cost of equity (CoE). Using a structural equation modelling approach—which is novel—it is shown that companies with high (low) quality information environments enjoy relatively lower (higher) CoE than other-wise identical firms; however, findings also show that the significance of this impact de-creases with firm size, maturity and profitability as well as market competition.
My third paper “Implied Cost of Capital and Cross-Sectional Earnings Forecasting Models: Evidence from Newly Listed Firms” pertains to work on implied cost of capital (ICC)—which is part of a greater literature on expected rate of returns—and analyses the degree to which earnings forecasting models can be used to derive valid ICC estimates for newly listed firms. Results show that combining the earnings model of Hou et al. (2012, HVZ) with the earnings persistence (EP) model of Li and Mohanram (2014) into one forecasting solution generates less forecast bias, higher earnings response coefficients and more valid ICC estimates vis-à-vis the HVZ, EP and RI (residual income) models stand-alone. This suggests that for smaller and younger firms more complex forecasting solutions are required to ensure reliability of model-based ICC estimates.
The concluding chapter synthesizes the main findings of this thesis, indicates potential avenues for future research and discusses implications for practice.
|Date of Award||2018|
|Supervisor||Tarik Driouchi (Supervisor) & Colin Clubb (Supervisor)|