The first author is Professor of Accounting, George S. and Dolores Doré Eccles Presidential Endowed Chair in Ethical Financial Reporting, David Eccles School of Business, University of Utah, Salt Lake City, Utah, USA. The second author is Associate Professor of Accounting, David Eccles Faculty Fellow, David Eccles School of Business, University of Utah, Salt Lake City, Utah, USA. The authors wish to thank Rachel Hayes for her insightful comments, Stephen Brown for providing the PIN data used in this study, and two anonymous referees. We also wish to thank the workshop participants at Indiana University, London Business School, New York University, Northwestern University, Office of Economic Analysis at the SEC, Toronto University, University College Dublin, University of Southern California, University of Tennessee, University of Utah, Washington University, Wharton, University of Wisconsin-Madison, and the 2007 FARS mid-year meeting for their helpful comments on previous drafts of this paper. The authors gratefully acknowledge the financial support of the David Eccles School of Business and the contribution of I/B/E/S Inc. for providing earnings per share forecast data, available through the Institutional Brokers Estimate System. These data have been provided as part of a broad academic programme to encourage earnings expectations research. (Paper received April, 2012; revised version accepted June, 2013).
Are Information Attributes Priced?
Version of Record online: 16 SEP 2013
© 2013 John Wiley & Sons Ltd
Journal of Business Finance & Accounting
Volume 40, Issue 9-10, pages 1045–1067, November/December 2013
How to Cite
Botosan, C. A. and Plumlee, M. A. (2013), Are Information Attributes Priced?. Journal of Business Finance & Accounting, 40: 1045–1067. doi: 10.1111/jbfa.12044
- Issue online: 17 DEC 2013
- Version of Record online: 16 SEP 2013
- David Eccles School of Business
- information attributes;
- cost of equity capital;
- realized returns
A seminal model in finance links cost of equity capital to information precision, composition and dissemination. Using realized returns to proxy for cost of equity capital and the probability of an informed trade (PIN) to proxy for composition, prior research documents results consistent with the model's prediction regarding composition. Nonetheless, prior research that examines the construct validity cautions against the use of future realized returns to proxy for cost of equity capital and recommend rDIV_PREM or rPEG_PREM instead. The authors speculate but do not demonstrate how the results in existing research might be incorrect due to their use of realized returns. This paper provides such evidence. We find that the authors inference regarding PIN is dependent on their choice of realized returns to proxy for cost of equity capital. We also estimate a more complete specification of the model that includes precision and dissemination, and we decompose PIN into its component parts to isolate that portion of PIN that varies with dissemination. These refinements allow for new insights regarding the veracity of the model's predictions. We conclude that cost of equity capital is increasing in composition, and decreasing in dissemination, and find some, albeit not conclusive support, for the prediction that cost of equity capital is decreasing in precision.