DP15658 Information Complementarities and the Dynamics of Transparency Shock Spillovers

Author(s): Shantanu Banerjee, Sudipto Dasgupta, RUI SHI, Jiali Yan
Publication Date: January 2021
Keyword(s): Cost of Equity, Disclosure, Information Complementarity, Information Environment, transparency
JEL(s): G14, G30, M41
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15658

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.