Essays on Information Quality and Capital Markets

This dissertation studies the role of information quality in capital markets. The first essay explores whether the level of noise trading affects the pricing of information quality. The second essay investigates whether information quality affects firms' stock price crash risk.;In the first essay, I examine whether the inconclusive evidence of a negative relation between information quality and expected returns is a function of uninformed traders' uncertainty about whether other traders are noise traders or informed traders. This uncertainty can lead to a non-monotonic relation between information quality and expected returns that depends on the level of noise trading. Using portfolio sorts, time-asset asset pricing tests, and cross-sectional asset pricing tests, I find evidence that expected returns are decreasing (increasing) in information quality when the level of noise trading is low (high). My results indicate that the level of noise traders may mitigate or even counter-act the intended benefits of improvements in information quality. This finding has important implications for standard setting and firms' disclosure policy because it is contrary to the conventional wisdom that more precise information will always reduce the cost of capital.;In the second essay, my co-authors and I use disclosed internal control weaknesses (ICW) as a measure of information quality to examine the relation between information quality and stock price crash risk. We find that in the year prior to the initial disclosures, firms with ICWs are more crash-prone than firms with effective internal controls. This positive relation is more pronounced when weakness problems are associated with a firm's financial reporting process. More importantly, we find that stock price crash risk decreases significantly after the disclosures of ICWs, despite the disclosure itself signaling bad news. Our results have two implications. First, our results suggest that ICW captures the opacity of the firm's information environment. Second, we provide evidence that public disclosures of ICWs trigger the remediation of the ICW problems, thereby mitigating crash risk.