Information and the Cost of Capital: An Ex Ante Perspective

Peter Ove Christensen, Leonidas Enrique de la Rosa, Gerald A. Feltham

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
Original languageEnglish
JournalAccounting Review
Volume85
Issue number3
Pages (from-to)817-848
ISSN0001-4826
DOIs
Publication statusPublished - 2010
Externally publishedYes

Cite this

Christensen, Peter Ove ; de la Rosa, Leonidas Enrique ; Feltham, Gerald A. / Information and the Cost of Capital: An Ex Ante Perspective. In: Accounting Review. 2010 ; Vol. 85, No. 3. pp. 817-848.
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Information and the Cost of Capital: An Ex Ante Perspective. / Christensen, Peter Ove; de la Rosa, Leonidas Enrique; Feltham, Gerald A.

In: Accounting Review, Vol. 85, No. 3, 2010, p. 817-848.

Research output: Contribution to journalJournal articleResearchpeer-review

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AU - de la Rosa, Leonidas Enrique

AU - Feltham, Gerald A.

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AB - 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.

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