Market Liquidity, Private Information, and the Cost of Capital: Microstructure Studies on Family Firms in Japan

It has been suggested that the cost of capital for a family firm depends on, among other things, a “family effect,” which deals with the family's relation to its business. Financial theory regarding the cost of capital states that the cost of capital is a market-based function of the characteristics of the investment, not the investor. This theory suggests that a firm's cost of capital does not depend on a family effect. However, not all financial economists' assumptions regarding the cost of capital hold for the family firm. This paper reviews the relevant literature regarding the cost of capital and applies it to the family firm. Knowing the correct cost of capital will enable family owner-managers to make better investment and financing decisions, evaluate performance, and structure rewards for performance.

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Information, Investment Adjustment, and the Cost of Capital

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109018000194 ◽

2018 ◽

Vol 53 (4) ◽

pp. 1715-1754 ◽

Cited By ~ 1

Author(s):

Lixin Huang ◽

Qiang Kang

Keyword(s):

Private Information ◽

Stock Prices ◽

Cost Of Capital ◽

Growth Firms ◽

High Flexibility ◽

The Cost

Private information imposes a severe trading disadvantage on uninformed traders while at the same time providing firms with valuable signals for investment adjustment. The two forces have opposite impacts on the cost of capital, and the net effect depends on which force dominates. We show that stocks of firms with low flexibility in investment adjustment (“value firms”) command an information premium, whereas stocks of firms with high flexibility in investment adjustment (“growth firms”) deliver an information discount. These results are consistent with the findings that growth firms exhibit stronger investment sensitivity to information in stock prices than value firms.

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Differential Access to Price Information in Financial Markets

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109016000491 ◽

2016 ◽

Vol 51 (4) ◽

pp. 1071-1110 ◽

Cited By ~ 15

Author(s):

David Easley ◽

Maureen O’Hara ◽

Liyan Yang

Keyword(s):

Financial Markets ◽

Cost Of Capital ◽

Market Liquidity ◽

Selling Price ◽

Return Volatility ◽

Price Information ◽

Market Data ◽

Fundamental Information ◽

The Cost ◽

Capital Return

Recently, exchanges have been directly selling market data. We analyze how this practice affects price discovery, the cost of capital, return volatility, market liquidity, information production, and trader welfare. We show that selling price data increases the cost of capital and volatility, worsens market efficiency and liquidity, and discourages the production of fundamental information relative to a world in which all traders observe prices. Generally, allowing exchanges to sell price information benefits exchanges and harms liquidity traders. Overall, our results suggest that regulations on selling market data can play an important role in improving market quality and trader welfare.

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