City Research Online

Abstract

We use structural equation modelling (SEM) for a robust test of the role information quality plays in explaining the cost of equity capital (CoE). SEM allows us to reliably identify the direct and indirect effects that three information quality attributes, quantity, asymmetry and precision, have on CoE. The method also reduces the error-in-variables problem, which stems from selectivity in proxies for information quality and CoE. Using nine proxies to capture the variation in information quality
attributes and nine CoE measures, we document that the direct effects of precision and asymmetry are equally important in explaining variation in CoE, while quantity has a negative direct effect. Quantity has a positive indirect effect on CoE mediated through asymmetry and precision. The strength of the relations we identify varies according to firm size, maturity, profitability and with proxies for CoE, which suggests that sample compositions and measurement choices affect the power of tests. Our results consolidate mixed evidence on the relation between information quality and CoE that is often based on a single measure of information quality and ignores indirect channels.

Publication Type:	Article
Additional Information:	This article has been accepted for publication and will be published in "Asia-Pacific Financial Markets", Springer.
Publisher Keywords:	cost of equity; implied cost of capital; information risk; information quality; structural equation modelling
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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