Research On The Impact Of Information Structure With Information Cost On Cost Of Equity Capital

we relax the assumption that information is free and develop a informationstructure model adding a new factor—information cost, under the theoreticalframework of information structure model created by Easley and O’Hara(2004). Weestablish the equilibrium model between information structure and four aspects ofinformation structure, including information cost, information risk, quality ofinformation disclosure and prior information.We not only proved Easley and O’Hara’s3propositions:(1)the more privateinformation,the higher information risk, so is the cost of capital.(2)the higher privateand public information precision, the lower cost of capital.(3) the greater priorprecision, the lower cost of capital, but also proved the uncertain relationship betweeninformation cost and cost of capital. The initiative difference we make from Easleyand O’Hara(2004) are that adding information cost into the theoretical model andprovide empirical results. Based on the market microstructure theory, we chooseprobability of informed trading(PIN) to measure information risk and select adverseselection cost as the proxy of information cost. These indexes are directly computedfrom the high frequency data which can objectively reflect the investor sentiment andthe game between informed trade and uninformed trader. Meanwhile, we select thehistory and size of listed company as the proxy of the quality of prior information,and just as other scholars, we consider the rank given by Shenzhen SE as the proxy ofquality of disclosure information.In the empirical study, we find that the relation between information cost andequity cost is an inversed U shaped curve; information risk has a positive effect onequity cost; quality of information has a negative effect on cost of capital. Companysize is a better proxy for precision of prior information compared with company’shistory.The innovation in empirical study have further enriched the achievements inthis field. It can also offer referential significance for other researchers.