Financial Terms
Information costs

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Definition of Information costs

Information Costs Image 1

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Related Terms:

Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.

Agency costs

The incremental costs of having an agent make decisions for a principal.

Asymmetric information

information that is known to some people but not to other people.

Carring costs

costs that increase with increases in the level of investment in current assets.

Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).

Information Costs Image 2

Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.

Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.

Information asymmetry

A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Information-content effect

The rise in the stock price following the dividend signal.

Informational efficiency

The speed and accuracy with which prices reflect new information.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

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Insider information

Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.

Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.

Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.

Price impact costs

Related: market impact costs

Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.

Sunk costs

costs that have been incurred and cannot be reversed.

Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.

Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, information
costs, search costs.

Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.

Direct costs

costs that are readily traceable to particular products or services.

Information Costs Image 4

Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.

Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.

Period costs

The costs that relate to a period of time.

Semi-fixed costs

costs that are constant within a defined level of activity but that can increase or decrease when
activity reaches upper and lower levels.

Semi-variable costs

costs that have both fixed and variable components.

Standard costs

A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a

Sunk costs

costs that have been incurred in the past.

capitalization of costs

When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.

fixed expenses (costs)

Expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. Fixed operating costs provide capacity to carry on
operations and make sales. Fixed manufacturing overhead costs provide
production capacity. Fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.

overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.


bits of knowledge or fact that have been carefully
chosen from a body of data and arranged in a meaningful way

management information system (MIS)

a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
alternative situations

carrying costs

costs of maintaining current assets, including opportunity cost of capital.

costs of financial distress

costs arising from bankruptcy or distorted business decisions before bankruptcy.

fixed costs

costs that do not depend on the level of output.

information content of dividends

Dividend increases send good news about cash flow and earnings. Dividend cuts send bad news.

shortage costs

costs incurred from shortages in current assets.

sunk costs

costs that have been incurred and cannot be recovered.

variable costs

costs that change as the level of output changes.

Menu Costs

The costs to firms of changing their prices.

Costs Capitalized in Stealth

A particularly egregious form of aggressive cost capitalization
where inappropriately capitalized costs are hidden within other unrelated account balances.

Policy Acquisition Costs

costs incurred by insurance companies in signing new policies, including expenditures on commissions and other selling expenses, promotion expenses, premium
taxes, and certain underwriting expenses. Refer also to customer, member, or subscriber
acquisition costs.

Political Costs

The costs of additional regulation, including higher taxes, borne by large and
high-profile firms.

Preopening Costs

A form of start-up cost incurred in preparing for the opening of a new store or facility.

Start-up Costs

costs related to such onetime activities as opening a new facility, introducing
a new product or service, commencing activities in a new territory, pursuing a new class of customer,
or initiating a new process in an existing or new facility.

Medical Information Bureau

This organization was established in 1902. The Medical information Bureau (M.I.B.) is a non-profit association of life insurance companies. Its purpose is to detect and deter fraud by providing warnings called, alerts, to member companies. For example, if an insurance applicant advised one insurance company of a heart attack and then applied to another insurance company omitting this history, codes, reported by the first insurance company, indicating a heart attack would alert the second insurance company to the undisclosed history. It is a rarity, however, that the alert is the only notice of a specific medical impairement as most applicants completely disclose their history.

Funding Costs

The price of obtaining capital, either borrowed or equity, with intent to carry on business operations.

Future-Oriented Financial Information

information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. Future-oriented financial information is presented as either a forecast or a projection.

Undepreciated Capital Costs

The tax definition of the value of an asset that is eligible for tax deprecation.

Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

Expense ratio

The percentage of the assets that were spent to run a mutual fund (as of the last annual
statement). This includes expenses such as management and advisory fees, overhead costs and 12b-1
(distribution and advertising ) fees. The expense ratio does not include brokerage costs for trading the
portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of
Additional information (SAI). the SAI is available to shareholders on request. Neither the expense ratio or the
SAI includes the transaction costs of spreads, normally incurred in unlisted securities and foreign stocks.
These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an
Operating Expense Ratio (OER).

Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.

Management accounting

The production of financial and non-financial information used in planning for the future; making decisions about products, services, prices and what costs to incur; and ensuring that plans are implemented and achieved.

activity-based costing (ABC)

a process using multiple cost drivers to predict and allocate costs to products and services;
an accounting system collecting financial and operational
data on the basis of the underlying nature and extent
of business activities; an accounting information and
costing system that identifies the various activities performed
in an organization, collects costs on the basis of
the underlying nature and extent of those activities, and
assigns costs to products and services based on consumption
of those activities by the products and services

business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market

cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a

cost table

a database providing information about the impact
on product costs of using different input resources,
manufacturing processes, and design specifications







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