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The Role of Information Precision in Determining the Cost of Equity Capital

Author

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  • Christine A. Botosan

    (University of Utah)

  • Marlene A. Plumlee

    (University of Utah)

  • Yuan Xie

    (University of Utah)

Abstract

We examine the association between the cost of equity capital and the quality of public and private information. We find an inverse relationship between the cost of capital and the precision of public information, but the effect is more than offset by a positive relationship between the cost of equity capital and the precision of private information. Public and private information precisions are positively correlated, and a model that fails to include both is vulnerable to a correlated omitted variable bias. The association between public and private information combined with their opposing effects on the cost of capital implies mangers should consider the relationship between public and private information when assessing their reporting strategy.

Suggested Citation

  • Christine A. Botosan & Marlene A. Plumlee & Yuan Xie, 2004. "The Role of Information Precision in Determining the Cost of Equity Capital," Review of Accounting Studies, Springer, vol. 9(2), pages 233-259, June.
    • Handle: RePEc:spr:reaccs:v:9:y:2004:i:2:d:10.1023_b:rast.0000028188.71604.0a
    DOI: 10.1023/B:RAST.0000028188.71604.0a
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    Cited by:

    1. Yu Hou, 2015. "The role of diversification in the pricing of accruals quality," Review of Accounting Studies, Springer, vol. 20(3), pages 1059-1092, September.
    2. Stephen P. Baginski & Kenneth C. Rakow, 2012. "Management earnings forecast disclosure policy and the cost of equity capital," Review of Accounting Studies, Springer, vol. 17(2), pages 279-321, June.
    3. Per Olsson, 2008. "Discussion of “inventory policy, accruals quality and information risk”," Review of Accounting Studies, Springer, vol. 13(2), pages 411-417, September.
    4. Ying Cao & James N. Myers & Linda A. Myers & Thomas C. Omer, 2015. "Company reputation and the cost of equity capital," Review of Accounting Studies, Springer, vol. 20(1), pages 42-81, March.
    5. Merle Erickson & Shiing-Wu Wang & X. Frank Zhang, 2012. "The change in information uncertainty and acquirer wealth losses," Review of Accounting Studies, Springer, vol. 17(4), pages 913-943, December.
    6. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2011. "Analyst forecast characteristics and the cost of debt," Review of Accounting Studies, Springer, vol. 16(1), pages 116-142, March.

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