A Note on Information and the Cost of Capital: The Easley-O’Hara (2004) Model with Endogenous Information Acquisition

Australian Journal of Management, April 2011

15 Pages Posted: 14 Dec 2010 Last revised: 25 Jan 2011

See all articles by Greg Clinch

Greg Clinch

Macquarie Business School

Brett Lombardi

University of Chicago - Booth School of Business; University of Melbourne - Department of Accounting & Business Information Systems

Date Written: January 11, 2011

Abstract

We investigate the impact of endogenous information acquisition on Easley and O’Hara’s (2004) result that moving information from being publicly to privately available results in an increase in a firm’s cost of capital. As in Christensen, de la Rosa and Feltham (2010), when the cost of information acquisition is fixed, Easley and O’Hara’s result reverses. We study two scenarios, however, where Easley and O’Hara’s result can continue to hold: (i) where the cost of information acquisition is increasing in its precision, and (ii) where the benefits of acquiring private information span multiple firms.

Keywords: cost of capital, endogenous information acquisition

JEL Classification: M41

Suggested Citation

Clinch, Greg and Lombardi, Brett J., A Note on Information and the Cost of Capital: The Easley-O’Hara (2004) Model with Endogenous Information Acquisition (January 11, 2011). Australian Journal of Management, April 2011, Available at SSRN: https://ssrn.com/abstract=1722998

Greg Clinch (Contact Author)

Macquarie Business School ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

Brett J. Lombardi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of Melbourne - Department of Accounting & Business Information Systems ( email )

Victoria, 3010
Australia

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