Use of private information in stock trading and its impact on the cost of equity

In the capital markets, it is assumed that all issued information is available to public, immediately or after a short time. However, many researchers believe that this assumption is too optimistic and always there are people that they have more information than others. Furthermore, they may have access to firm’s private information and use that information to stock trading. This research investigates the effects of probability of trading based on firm’s private information (PIN) and the effect of bid-ask spread; (as two factors of information asymmetry) on the cost of equity capital (CoE) from 2008 to the end of 2013 in 112 firms listed in Tehran Stock Exchange. The research results show that the increase in probability of stock trading based on private information about firms’ condition (PIN) and also increase in bid-ask spread, increases the firm’s cost of equity capital. On the other hand, there is a negative association between two factors of information asymmetry (PIN and bid-ask spread) and the cost of equity.