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

The Role of Information Precision in Determining the Cost of Equity Capital 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

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

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/B:RAST.0000028188.71604.0a
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 30, 2004

References

  • The Effects of Beta, Bid-Ask Spread, Residual Risk and Size on Stock Returns
    Amihud, Y.; Mendelson, H.
  • MD&;A Quality as Measured by the SEC
    Barron, O.; Kile, C.; O'Keefe, T.
  • Disclosure Level and the Cost of Equity Capital
    Botosan, C.
  • A Re-Examination of Disclosure Level and the Expected Cost of Equity Capital
    Botosan, C.; Plumlee, M.
  • Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns
    Brennan, M.; Subrahmanyam, A.
  • Information Effects on the Bid-Ask Spread
    Copeland, T.; Galai, D.
  • Optimal Release of Information by Firms
    Diamond, M.
  • Disclosure, Liquidity and the Cost of Capital
    Diamond, D.; Verrecchia, R.

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