Journal
JOURNAL OF ACCOUNTING & ECONOMICS
Volume 52, Issue 2-3, Pages 126-143Publisher
ELSEVIER
DOI: 10.1016/j.jacceco.2011.03.004
Keywords
Information quality; Earnings quality; Liquidity risk; Cost of capital; Disclosure
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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. (C) 2011 Elsevier B.V. All rights reserved.
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