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

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.

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Correspondence to Christine A. Botosan.

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Botosan, C.A., Plumlee, M.A. & Xie, Y. The Role of Information Precision in Determining the Cost of Equity Capital. Review of Accounting Studies 9, 233–259 (2004). https://doi.org/10.1023/B:RAST.0000028188.71604.0a

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  • private information
  • cost of capital
  • public information
  • risk