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A Re‐examination of Disclosure Level and the Expected Cost of Equity Capital
Author(s) -
Botosan Christine A.,
Plumlee Marlene A.
Publication year - 2002
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00037
Subject(s) - cost of capital , equity capital markets , cost of equity , implicit cost , equity (law) , dividend , equity capital , economics , business , equity risk , residual income valuation , monetary economics , financial economics , accounting , finance , microeconomics , total cost , valuation (finance) , initial public offering , profit (economics) , political science , law
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 erroneous conclusions.