Equity Capital Cost under the Transmission Mechanism of Market Information Environment

Abstract

Abstract:

A large number of studies suggest that the company's information disclosure level is negatively related to the cost of equity capital. However, the existing literatures neglect the indirect path of how the information disclosure influences the fluctuation of stock prices and finally causes changes in the cost of equity capital, which is bad for our comprehensive understanding of the determinants of the cost of equity capital. In this paper, we use R² to depict the market information environment. Based on the sample of A-share listed companies during the year 2000 to 2011 in China, we make an empirical study and find: R² is not only an effective alternative variable to the traditional level of information disclosure metrics, but also takes into account the whole process that the information disclosed affects the stock market fluctuations through the market transmission mechanism and thus affects the cost of equity capital, which effectively measures the overall effect of information disclosure and changes in the cost of capital leading by price fluctuations. Our study shows that, there is a significantly positive correlation between R² and the capital cost of listed companies. This conclusion remains unchanged when the traditional indicators of information disclosure are added.

Key words: transmission mechanism of market information, information disclosure, R², equity capital cost

Pi Tianlei, Tang Xiuping. Equity Capital Cost under the Transmission Mechanism of Market Information Environment[J]. , 2016, 28(2): 185-196.

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