Information and the Cost of Capital: An Ex Ante Perspective

• Published in: The Accounting review Vol. 85; no. 3; pp. 817 - 848
• Main Authors: Christensen, Peter O., de la Rosa, Leonidas E., Feltham, Gerald A.
• Format: Journal Article
• Language: English
• Published: Sarasota American Accounting Association 01-05-2010
• Subjects: Access to information; Capital costs; Capital investments; Capital market; Cost of capital; Dividends; Equilibrium; Equilibrium models; Equilibrium prices; Financial management; Financial reporting; Impact analysis; Information dissemination; Information storage and retrieval systems; Investors; Market prices; Prices; Public information; Risk premiums; Signal noise; Studies; Supply
• ISSN: 0001-4826; 1558-7967
• DOI: 10.2308/accr.2010.85.3.817

Recent articles have demonstrated that increased public disclosure can decrease firms' cost of capital. The focus has been on the impact of information on the cost of capital subsequent to the release of the information (the ex post cost of capital). We show that the reduction in the ex post cost of capital is offset by an equal increase in the cost of capital for the period leading up to the release of the information (the preposterior cost of capital). Thus, within the class of models framing the recent discussion, there is no impact on the ex ante cost of capital covering the full time span of the firm. The extent to which information is made publicly or privately available affects the timing of the resolution of uncertainty and when the information is reflected in equilibrium prices, but there is no impact on initial equilibrium prices. Within a noisy rational expectations equilibrium, rational investors may actually benefit from a higher ex post cost of capital.