Publication Type
Journal Article
Version
submittedVersion
Publication Date
9-2008
Abstract
Theorists have long recognized that information asymmetry among investors adversely affects the cost of raising equity capital (e.g., Diamond and Verrecchia 1991). When there is information asymmetry, relatively uninformed investors are reluctant to trade because of higher potential loss from transacting with informed investors (e.g., Glosten and Milgrom 1985; Kyle 1985). To trade, uninformed investors demand compensation for the risks of trading with informed investors (O’Hara 2003). In the case of issuing new equity, firms must issue shares at a discount to overcome the reluctance of uninformed investors. Such discounting leads to smaller proceeds to the firm and a higher cost of raising equity capital.Firms can reduce information asymmetry among investors through public disclosures or information intermediaries. Information asymmetry here refers broadly to differences in information sets among investors, including both differences in knowledge about the firm and the possibility that certain investors are not aware of the firm. In Merton’s 1987 words, it refers to both the depth and breadth of investor cognizance. Although a large body of research investigates the impact of public disclosures on the cost of capital, there is limited direct evidence on the impact of information intermediaries. Given that financial analysts occupy a central role in the acquisition and dissemination of information in capital markets, we investigate whether the amount and nature of analyst coverage are associated with the cost of raising equity capital.
Keywords
Analyst coverage, information asymmetry, cost of raising capital, underpricing, seasoned equity offering
Discipline
Accounting | Corporate Finance
Research Areas
Financial Performance Analysis
Publication
Contemporary Accounting Research
Volume
25
Issue
3
First Page
657
Last Page
700
ISSN
0823-9150
Identifier
10.1506/car.25.3.1
Publisher
Wiley
Citation
BOWEN, Robert M.; CHEN, Xia; and CHENG, Qiang.
Analyst coverage and the cost of raising equity capital: Evidence from underpricing of seasoned equity offerings. (2008). Contemporary Accounting Research. 25, (3), 657-700.
Available at: https://ink.library.smu.edu.sg/soa_research/826
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1506/car.25.3.1