Public Information and Efficient Capital Investments: Implications for the Cost of Capital and Firm Values

In a standard financial economics model of asset pricing and value-maximizing firms, we show that better public information about firm-specific and economy-wide events affects the allocation of capital investments among firms and over time. The consequences for capital market outcomes, such as risk, risk premia, interest rates, firm prices, and the cost of capital, depend on investor preferences and whether improvements are to firm-specific or economy-wide information. We show that interest rates and risk premia tend to move in opposite directions and that the effects on interest rates often dominate the effects on risk premia in determining firm values and the cost of capital.