Information and the Cost of Capital: An Ex-Ante Perspective

Abstract

The relationship between the informational environment and the cost of equity capital has received considerable interest in finance and accounting research as well as in financial reporting regulation. Recent papers have demonstrated that increased public disclosure may decrease firms' cost of capital, at least if the additional information pertains to systematic risk. The discussion has focused 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.In efficient economies with only public information, there is no impact of the information system choice on the investors' ex-ante expected utilities either. In the partially revealing rational expectations equilibrium of an economy with private investor information, however, the rational investors may actually benefit from a higher ex-post cost of capital (at the expense of the liquidity traders).