The relationship between accrual quality and the cost of capital
Date Issued
2006
Date
2006
Author(s)
Chen, Tien-Hsin
DOI
zh-TW
Abstract
Recent theoretical research (e.g., Easley and O’Hara, 2004; O’Hara, 2003; Leuz and Verrecchia, 2004) shows that information risk is a non-diversifiable risk factor and should be priced by investors. This study identify accruals quality as the measure of information risk associated with earnings to explore whether capital market or investors price accruals quality, and whether different sources of information risk – innate accruals quality and discretionary accruals quality – will have distinct cost of capital effects.
This paper refers to the method mentioned in Francis et al. (2005) to carry out a research in Taiwan’s capital market. This paper provides large sample evidences that reporting quality as captured by accruals quality is salient for investors. The empirical results show the significance relation between accruals quality and cost of capital. Higher accrual quality (indicates lower information risk) is associated with lower required return, but contrary to expectation, higher accrual quality is associated with larger cost of debt. The possible reasons are that this study omits one or more relevant variables that should be included in the model for a variety reasons and that debt market is inactive. Additionally, in equity market, the empirical results also indicate significantly smaller pricing effects of discretionary accruals quality, relative to innate accruals quality, but in debt market, there is a discrepancy in the empirical results.
This result indicates that equity market dose take the information of accruals quality revealed by financial statement into consideration.
Subjects
應計品質
資金成本
Information risk
Accrual quality
Cost of capital
Type
other
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