I investigate whether information quality affects the cost of equity capital through liquidity risk. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity; recent asset pricing literature has emphasized the importance of this systematic risk. I find that higher information quality is associated with lower liquidity risk and that the reduction in cost of capital due to this association is economically significant. I also find that the negative association between information quality and liquidity risk is stronger in times of large shocks to market liquidity.
Information quality, Earnings quality, Liquidity risk, Cost of capital, Disclosure
Accounting | Portfolio and Security Analysis
Financial Performance Analysis
Journal of Accounting and Economics
The Effect of Information Quality on Liquidity Risk. (2011). Journal of Accounting and Economics. 52, (2-3), 126-143. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/877