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. In addition, adverse selection can distort investors‟ trading decisions and result in inefficient and hence costly asset allocations for which investors need to be compensated, leading to a higher required rate of return or cost of capital (Garleanu and Pedersen, 2004). Moreover, adverse selection problems and trading costs in secondary markets fold back to the point at which the firm issues shares. Investors anticipate that they face price protection when they sell shares in the future and hence reduce the price at which they are willing to buy shares in the initial securities offering (e.g., Baiman and Verrecchia, 1996; Verrecchia, 2001). As a result, a firm must issue more shares to raise a fixed amount of capital. Thus, information asymmetry also translates into a higher cost of raising capital. In addition, information asymmetry and adverse selection in primary share markets can reduce the offering price and lead to underpricing. Myers and Majluf (1984) show that a firm may be willing to pass up profitable investment opportunities if the firm has to issue new securities to finance the investment and information is asymmetrically distributed managers and outside investors. Rock (1986) presents a model where uninformed investors face a winner‟s

curse and a firm has to underprice its securities to ensure the participation of uninformed investors in the offering.8 Next, there are theories that provide a direct link between disclosure and the cost of capital (or firm value), without Reference to market liquidity (and adverse selection costs). For example, Merton (1987) develops a model where (some) investors have incomplete information and are not aware of all firms in the economy. As a result, risk sharing is incomplete and inefficient. Disclosures by these lesser known firms can make investors aware of their existence and enlarge the investor base, which in turn improves risk sharing and lowers the cost of capital. This effect is likely to be less relevant to large firms with a substantial analyst and investor following. Moreover, the investor base effect is susceptible to arbitrage if some investors know which of the stocks are not known by all investors (Merton, 1987; Easley and O‟Hara, 2004). A direct link between disclosure and the cost of capital can also arise from estimation risk (e.g., Brown, 1979; Barry and Brown, 1984 and 1985; Coles, 1988). Estimation risk arises because parameters such as a firm‟s beta factor must be estimated (e.g., based on historical stock returns). For example, Barry and Brown (1985) and Coles et al. (1995) consider an information environment where some firms have longer time-series of returns than others. They find that, in this environment of asymmetric parameter uncertainty, securities with long time-series of returns have lower betas and expected returns than they would without estimation risk. However, they are unable to unambiguously sign the effect for securities with short time-series of returns. Aside from a relatively narrow representation of information, these studies do not provide comparisons across high- and low-information firms in a world with asymmetric parameter uncertainty and hence do not address the question of how firm-specific disclosures can influence

betas or expected returns. Moreover, it is not clear that parameter uncertainty for individual firms survives the forces of diversification (e本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。