Working Paper: CEPR ID: DP15658
Authors: Shantanu Banerjee; Sudipto Dasgupta; Rui Shi; Jiali Yan
Abstract: We show that information complementarities play an important role in the spillover of transparency shocks. We exploit staggered revelation of financial misconduct by S&P500 firms and find that the implied cost of capital increases for “close” industry peers relative to “distant” peers. Disclosure also increases. The effects are particularly strong when the close peers share common analysts and institutional ownership with the fraudulent firm. While disclosure remains high for the next four years, with sustained disclosure, the cost of equity starts to decrease. Firms’ financing patterns tilt more towards debt financing initially at the expense of equity, but eventually revert.
Keywords: cost of equity; disclosure; transparency; information environment; information complementarity
JEL Codes: G14; G30; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial misconduct (G28) | cost of capital (for close industry peers) (G32) |
| cost of capital (G31) | disclosure (increased frequency and length of management forecasts) (G17) |
| disclosure (G14) | cost of capital (G31) |
| financial misconduct (G28) | disclosure (increased frequency and length of management forecasts) (G17) |
| disclosure (increased frequency and length of management forecasts) (G17) | cost of capital (G31) |