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Aggregate Competition, Information Asymmetry and Cost of Capital: Evidence from Equity Market Liberalization *

This paper examines the effect of competition amongst traders in an economy on the pricing of information asymmetry. Given the cross-sectional and temporal variation in the level of investibility, emerging equity markets provide an ideal setting to examine the impact of an increase in competition on the extent to which information asymmetry affects cost of capital. Employing equity market liberalization for 31 countries between 1996 and 2006 as a pseudonatural experiment, we find that pricing of information asymmetry declines with an increase in the number of traders who can invest in the economy. Moreover, we find that the decline in pricing is greater when there is an increase in the number of uninformed traders.