TY  - JOUR
AU  - Lambert,Richard A.
AU  - Leuz,Christian
AU  - Verrecchia,Robert E.
TI  - Information Asymmetry, Information Precision, and the Cost of Capital
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14881
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14881
L1  - http://www.nber.org/papers/w14881.pdf
N1  - Author contact info:
Richard Lambert
Wharton School - University of Pennsylvania
3620 Locust Walk
Steinberg-Dietrich Hall
Philadelphia, PA 19104
E-Mail: lambertr@wharton.upenn.edu

Christian Leuz
Booth School of Business
University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637-1610
Tel: 773/834-1996
Fax: 773-834-4585
E-Mail: cleuz@chicagobooth.edu

Robert E. Verrecchia
Wharton School - University of Pennsylvania
Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
E-Mail: verrecch@wharton.upenn.edu
AB  - The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average precision effect of information that is heterogeneously distributed across investors is unlikely to diversify away when there exist many firms whose cash flows covary. Thus, better disclosure can reduce a firm's cost of capital. Third, the precision effect does not give rise to a separate information-risk factor. These points are important to empirical research in accounting and finance, as well as to regulators who debate future disclosure requirements and the consequences of prior requirements such as Regulation Fair Disclosure.
ER  -