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Information, Investment Adjustment, and the Cost of Capital

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  • Huang, Lixin
  • Kang, Qiang

Abstract

Private information imposes a severe trading disadvantage on uninformed traders while at the same time providing firms with valuable signals for investment adjustment. The two forces have opposite impacts on the cost of capital, and the net effect depends on which force dominates. We show that stocks of firms with low flexibility in investment adjustment (“value firms†) command an information premium, whereas stocks of firms with high flexibility in investment adjustment (“growth firms†) deliver an information discount. These results are consistent with the findings that growth firms exhibit stronger investment sensitivity to information in stock prices than value firms.

Suggested Citation

  • Huang, Lixin & Kang, Qiang, 2018. "Information, Investment Adjustment, and the Cost of Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(4), pages 1715-1754, August.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:04:p:1715-1754_00
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    1. Sana Saleem & Muhammad Usman & Muhammad Naveed Akhtar, 2023. "Does Private Information Always Hurt Retail Investors? The Impact of Private Information on Cost of Equity: Moderating Role of Investment Adjustment," SAGE Open, , vol. 13(4), pages 21582440231, November.

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