Information and the cost of capital: The Easley-O’Hara (2004) model with endogenous information acquisition

Clinch, Greg; Lombardi, Brett

doi:10.1177/0312896211401692

Cited by 7 publications

(5 citation statements)

References 5 publications

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“…There is a well-established theoretical literature which underlies the various empirical studies. Recent examples of this literature include Clinch and Lombardi (2011) who extend analysis into the relation between cost of equity capital and the proportion of investors with private information, Clinch (2013) which extends analysis into how diversification influences the link between disclosure quality and cost of equity capital, and Clinch and Verrecchia (2014) who investigate the association between voluntary disclosure and the risk-related discount investors apply to price.…”

Section: Relevance To Practicementioning

confidence: 99%

A review of accounting research in the Asia Pacific region

Benson

Clarkson

Smith

et al. 2015

Australian Journal of Management

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In this paper, we review scholarly accounting research published within the Asia Pacific Region by analysing nine of the main accounting journals within the region along five dimensions. The nine journals we focus on are: Accounting, Auditing and Accountability Journal; Australian Accounting Review; Abacus; Accounting and Finance; Australian Journal of Management; Accounting Research Journal; Journal of Contemporary Accounting and Economics; Managerial Auditing Journal; and Pacific Accounting Review. The five dimensions we consider are: the most frequently cited papers; topical coverage; impact on practice; research method; and noted authors. Our review leads us to conclude that the accounting journals published within the Asia Pacific region make a significant contribution to research and practice both within the region and internationally.

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Section: Relevance To Practicementioning

confidence: 99%

A review of accounting research in the Asia Pacific region

Benson

Clarkson

Smith

et al. 2015

Australian Journal of Management

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“…However, the average level of informedness (similar to Lambert et al's average level of precision) has increased, lowering the cost of capital. Clinch and Lombardi (2011) further examine the Easley and O'Hara and Christensen et al results. They study two settings where the Easley and O'Hara result might continue to hold with endogenous private information search.…”

Section: Current State Of the Artmentioning

confidence: 81%

Some personal observations on the debate on the link between financial reporting quality and the cost of equity capital

Shevlin¹

2013

Australian Journal of Management

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Within the last decade there has been much written about the possible link between the quality of a firm’s external financial reporting and its cost of equity capital. In this paper I provide my personal observations about the literature. I make the following points. I find the Francis et al. (2005) paper interesting and innovative. This paper documents a positive association between portfolio returns formed on the basis of accrual quality and firms’ realized returns after controlling for the Fama-French three factors. Francis et al. conclude that accrual quality is a priced risk factor. Second, while this conclusion might be too strong based on their results, I think the Core et al. (2008) critique of the Francis et al. claim is also too strong and does not lead me to reject accrual quality as a priced risk factor. Third, the evidence of an association between financial reporting quality and implied cost of capital estimates is robust. However several papers question the construct validity of these measures which are based on analyst earnings forecasts. I discuss these papers and conclude that the implied cost of capital does have empirical validity. Finally, various papers model the relation between financial reporting quality and cost of capital and, while interesting, mostly restrict themselves to a single factor asset pricing model. However, restricting the model to a single factor model by assumption rules out the possibility of information quality being a separately priced risk factor and further restricts the role information quality to informing about a firm’s covariances (or estimation error in the CAPM beta) because it is assumed that information quality is diversifiable. I think whether something is diversifiable is an empirical question that cannot be resolved by assumption within a theoretical model.

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“…For instance, even though we obtain evidence suggesting that investors respond to more complex accounting reports by demanding information from other sources, we do not know with certainty how effective this strategy is at mitigating uncertainty. Predictions from general equilibrium models with endogenous information acquisition (Clinch and Lombardi, 2011;Opp, 2015;Han and Yang, 2013) are contradictory and highly dependent on model assumptions. This leaves managers and regulators with no definite answer on how complexity influences cost of capital.…”

Section: Resultsmentioning

confidence: 99%

Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations

Filzen

Schutte

2017

The North American Journal of Economics and Finance

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We investigate the effect of financial reporting complexity on stock comovement. We hypothesize that investors deal with complexity increases by acquiring low cost information. This information is typically informative not just about the firm of interest but also about other firms with similar fundamentals, which generates excess comovement. We find that increases in 10-Q word counts, a complexity proxy, are consistently followed by increases in 1) internet searches about the firm and 2) R 2 s from regressions between the firm's returns and its peers'. On a large scale, complexity-induced comovement might hinder investors' ability to discriminate across stocks and identify business innovators.

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Information and the cost of capital: The Easley-O’Hara (2004) model with endogenous information acquisition

Cited by 7 publications

References 5 publications

A review of accounting research in the Asia Pacific region

A review of accounting research in the Asia Pacific region

Some personal observations on the debate on the link between financial reporting quality and the cost of equity capital

Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations

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