Investor relations level and cost of capital: evidence from Japanese firms

Purpose - The purpose of this paper is to examine the relationship between the level of investor relations and cost of capital of Japanese electric appliance firms. Design/methodology/approach - A two-step estimation procedure is used to estimate a regression model of a firm's information asymmetry component of cost of capital on the level of investor relations and other firm characteristics in order to control for self-selection bias. Findings - As expected, a negative link between the level of investor relations and cost of capital is documented after controlling for self-selection bias, firmcharacteristics, and additional robustness check. Research limitations/implications - The result of the paper is based on a sample of listed Japanese electric appliance firms, and thus may not be generalized to other industries or institutional settings. Total spread, which consists of information cost, inventory holding cost, and other processing cost component, might produce measurement errors and thus bias against the results. Further researchers should endeavor to isolate information cost component from total spread. Practical implications - Involving in investor relations' activities to reduce information asymmetries ultimately narrows bid-ask spread, and thus reduces cost of capital. An important implication, therefore, is that managers should treat any market participants equally by communicating to a broad spectrum of investor communities via investor relations. Originality/value - The current paper contributes to the literature by modeling and explicitly controlling for self-selection bias and being the first study to investigate the association between investor relations and cost of capital for Japanese firms.