Information and the Cost of Capital: An Ex Ante Perspective

Abstract

ABSTRACT:Recent articles have demonstrated that increased public disclosure can decrease firms’ cost of capital. The focus has been on the impact of information on the cost of capital subsequent to the release of the information (theex postcost of capital). We show that the reduction in theex postcost of capital is offset by an equal increase in the cost of capital for the period leading up to the release of the information (thepreposteriorcost of capital). Thus,within the class of modelsframing the recent discussion, there is no impact on theex antecost 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. Within a noisy rational expectations equilibrium, rational investors may actually benefit from a higherex postcost of capital.