Journal of Accounting Research
Vol. 40 No. 1 March 2002
Printed in U.S.A.
A Re-examination of Disclosure
Level and the Expected Cost
of Equity Capital
CHRISTINE A. BOTOSAN
AND MARLENE A. PLUMLEE
Received 10 January 2000; accepted 8 October 2001
This paper examines the association between the cost of equity capital and
levels of annual report and timely disclosure, and investor relations activities.
We estimate the cost of equity capital using the classic dividend discount model.
We ﬁnd that the cost of equity capital decreases in the annual report disclosure
level but increases in the level of timely disclosures. The latter result is contrary
to theory but is consistent with managers’ claims that greater timely disclosures
may increase the cost of equity capital, possibly through increased stock price
volatility. We ﬁnd no association between the cost of equity capital and the level
of investor relations activities. We conclude that aggregating across different
disclosure types results in a loss of information. Failing to include all disclosure
types in regression analyses may lead to a correlated omitted variable bias and
This paper explores the association between the expected cost of equity
capital and three types of disclosure (annual report, quarterly and other
University of Utah. The authors would like to thank Professor Shelley Rhoades for her
assistance in using Mathematica and Professor Nicolas Bollen for his assistance with the numer-
ical approximation program. We would also like to thank our anonymous reviewer, Andrew
Christie, Myron Gordon, Neil Bhattacharya, Uri Loewenstein, Jim Ohlson, Taylor Randall and
the workshop participants at the 2000 American Accounting Association Annual Meeting,
Louisiana State University, The Eleventh Annual Conference of Financial Economics and Ac-
counting at the University of Michigan, New York University, University of Notre Dame, and
the University of Utah for their helpful comments and suggestions.
, University of Chicago on behalf of the Institute of Professional Accounting, 2002