Philip G. Berger, Huafeng (Jason) Chen, and Feng Li
Abstract:
We develop a comprehensive and large-sample measure of a firm’s information quality.
The measure is the ratio of firm-specific return variation to firm-specific cash-flow
variation. Empirical evidence supports the validity of our measure. Using this measure,
we find that cost of equity capital decreases by about -0.4% on an annual basis
if a firm’s information quality increases by one standard deviation. This is consistent
with the joint hypotheses that (1) firm-specific stock returns contain economic information
s argued by Morck, Yeung, and Yu (2000) and (2) better information quality
can lower the cost of equity.