When Free Speech Lowers the Cost of Equity

A fundamental question in corporate finance is how the flow of information affects the cost of raising capital. Investors tend to reward transparency because it helps them evaluate a firm’s risks and prospects, and they often accept lower returns when they feel well-informed. However, not all information is positive. Many firms worry that allowing critics to speak freely may make the firms appear risky and prompt investors to require higher returns. In a new article, we examine this trade-off and argue that laws promoting open dialogue – even critical dialogue – about firms, help lower their cost of equity (COE).

We focus on U.S. state anti-SLAPP laws designed to protect individuals and organizations from “Strategic Lawsuits Against Public Participation.” Typically, firms or powerful individuals file SLAPPs to intimidate or silence criticism from employees, journalists, whistleblowers, or activists by imposing burdensome legal costs. Anti-SLAPP laws enable judges to dismiss such cases quickly and, in many instances, require the suing party to cover the defendant’s legal fees. Over the past three decades, 38 states and the District of Columbia have adopted some form of anti-SLAPP protection.

We use these laws as a quasi-natural experiment to investigate how freer speech influences firms’ COE. This cost directly affects how much firms pay to raise money in equity markets, making it critical to corporate investment and growth. Importantly for our study’s research methodology, anti-SLAPP laws are enacted for reasons independent of firms’ financing costs, such as protecting free speech rights and reducing judicial backlogs.

Our research includes more than 50,000 firm-year observations from 1987 to 2023, using an implied COE measure derived from stock prices and analyst earnings forecasts. This approach captures investors’ forward-looking expectations, rather than relying solely on realized stock returns, which can be noisy and influenced by factors unrelated to financial costs. To identify the effect of anti-SLAPP laws, we employ an imputation-based difference-in-differences research design that compares changes in firms in states that adopt these laws with changes in firms in states that do not, accounting for potential estimation bias due to the staggered enactment of these laws over multiple years.

We find that, following the adoption of anti-SLAPP laws, firms experience a significant decline in their equity financing costs. On average, the COE falls by 45.5 basis points relative to firms not covered by such laws. Given an average COE of 6.6 percent, this represents a reduction of approximately 6.9 percent, which is a substantial and economically meaningful effect.

Why do speech protections lower the COE? One possibility explored in our study is that even if more negative information becomes public, the overall increase in transparency reduces uncertainty, allowing investors to assess risk more effectively and ultimately lowering firms’ COE. Our results strongly support this view; in other words, transparency pays.

We find that anti-SLAPP laws enhance firms’ information environments in several ways. First, measures of information asymmetry – such as bid-ask spreads, illiquidity, and the probability of  informed trading – decline following the adoption of these laws. This suggests that investors face fewer informational frictions when trading these firms’ stocks, enabling them to feel more confident that they have access to comprehensive information. Second, the risk of sudden stock price crashes declines after the laws are enacted. Crash risk is often linked to managers hoarding bad news until it can no longer be concealed. By making it safer for employees and other stakeholders to speak out earlier, anti-SLAPP laws appear to reduce these information bottlenecks. Third, overall risk measures – including total volatility, firm-specific idiosyncratic volatility, and market beta – also decrease, indicating that investors perceive these firms as better understood.

Additionally, we show that the reduction in the COE is not uniform across all firms. The benefits are especially pronounced for firms that historically have disclosed little information, such as those that do not issue management earnings forecasts or whose earnings are weakly linked to cash flows. For these firms, the ability of outside stakeholders to speak freely is particularly valuable because investors have fewer alternatives for learning about their activities. We also find larger reductions in the COE for labor-intensive firms and those employing more skilled workers. Employees often possess unique, firm-specific knowledge, and legal protections that make it safer for them to speak out seem to play a material role in reducing information gaps.

Our findings have important implications for law, policy, and corporate practice. For lawmakers, anti-SLAPP statutes are often discussed primarily as First Amendment protections. However, our research shows that these laws also have economic benefits. By encouraging open dialogue about corporate practices, they reduce uncertainty and enhance capital-market efficiency. This insight may be particularly valuable for jurisdictions that have not yet enacted such protections or are considering expanding them.

For firms, the findings may seem counterintuitive. A common view is that increased criticism elevates reputational risk and raises financing costs. Conversely, we find that greater openness and transparency foster investor confidence, leading to lower financing costs. By decreasing information asymmetry and minimizing unexpected negative surprises, a freer flow of information makes firms more predictable and, ultimately, less risky in the eyes of investors. Firms concerned about reputational harm should recognize that the long-term financing benefits may outweigh the short-term discomfort associated with increased scrutiny.

For investors, our findings highlight the impact of laws on the quality of information available in financial markets. Jurisdictions that promote free speech create an environment where both positive and negative news flows more freely, resulting in more efficient pricing and reduced risk premiums. These insights are crucial for portfolio allocation decisions and risk assessments, especially when evaluating firms in states with varying levels of speech protection.

Our research demonstrates that free speech protections not only benefit democratic participation, but also deliver measurable economic advantages. By encouraging the free flow of even negative information, anti-SLAPP laws enable firms to raise capital at lower cost and help investors make more informed decisions. These findings underscore a simple yet powerful conclusion: When people can speak freely, markets operate more effectively, benefiting all.

This post comes to us from professors Scott Guernsey at the University of Tennessee, Matthew Serfling at the University of Tennessee, and Cheng Yan at the Huazhong University of Science and Technology. It is based on their recent working paper, “When Speaking Freely Pays: Anti-SLAPP Laws and Firms’ Cost of Equity,” available here.

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