Internal information asymmetry and cost of equity capital: Evidence from insider trading profitability disparities

Using the disparity in top- and lower-level managers’ insider trading profitability as a proxy for internal information asymmetry ( IIA ), this paper examines the association between IIA and cost of equity capital. Our results show that a one-standard-deviation increase in IIA correlates with a 9-basis-point rise in cost of equity capital. Results suggest that heightened IIA elevates firm’s information risk and operating risk perceived by external investors, as reflected in a higher cost of equity capital. Furthermore, this association is more pronounced in firms characterized by less efficient investments or internal capital markets. Our findings underscore the role of internal information environments in shaping external financing costs. Policymakers and firms must prioritize governance frameworks to reduce financing costs driven by internal information asymmetry. Overall, our findings highlight the necessity for firms to treat internal information asymmetry as a governance priority that bridges internal efficiency and external financial market.