Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location


  • Accepted by Christine Botosan. We would like to thank Christine Botosan, John Core, Clifton Green, Lew Johnson, Kose John, Steven Monahan, Selim Topaloğlu, and two anonymous reviewers, as well as seminar participants at the 2010 Southern Finance Association Meeting, Memorial University of Newfoundland, Queen’s University, and Saint Mary’s University for constructive comments. We also appreciate generous financial support from Canada’s Social Sciences and Humanities Research Council. Part of this research was conducted while Saadi was visiting INSEAD, Fontainebleau campus. Finally, the authors gratefully acknowledge financial support from the Campus Saint-Jean at the University of Alberta (El Ghoul), the Center for International Business Education and Research at the University of South Carolina (Guedhami), and the CMA Professorship at Memorial University (Pittman).


The scarcity of suitable proxies for asymmetric information has impeded empirical research from providing reliable evidence on whether information risk shapes equity pricing. In reexamining this unresolved question, we rely on firms’ geographic distance from financial centers to gauge information asymmetry. We provide strong, robust evidence supporting the prediction that equity financing is cheaper for firms nearer central locations, implying that investors rationally require more compensation when information asymmetry is worse. The equity pricing role of geographic proximity is economically large, with our coefficient estimates translating into firms located within 100 kilometers of the city center of the nearest of six major financial centers, or in their metropolitan statistical areas, enjoying equity financing costs that are seven basis points lower. Our inferences are insensitive to measuring both the cost of equity capital and distance in several ways, controlling for corporate governance quality, and addressing endogeneity. Collectively, our analysis suggests that investors discount the price that they pay for their securities to reflect the greater information asymmetry that ensues when firms are far from major financial centers.