Information and the Cost of Capital


  • David Easley,

  • Maureen O'hara

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    • Both authors are at Cornell University. We would like to thank an anonymous referee, Anat Admati, Christopher Gadarowski, Richard Green, Jerry Hass, Soeren Hvidkjaer, Roger Ibbotson, Eugene Kandel, Karl Keiber, Wayne Ferson, René Stulz, and seminar participants at City University of London, Colorado, Columbia, Cornell, the European Finance Association Meetings (Berlin), Maryland, Michigan State, Ohio State, the Oxford Summer Finance Institute, Rochester, University of Houston, and Yale for helpful comments.


We investigate the role of information in affecting a firm's cost of capital. We show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio to incorporate new information, and uninformed investors are thus disadvantaged. In equilibrium, the quantity and quality of information affect asset prices. We show firms can influence their cost of capital by choosing features like accounting treatments, analyst coverage, and market microstructure.