Earnings Quality and the Cost of Capital
Date Issued
2005
Date
2005
Author(s)
Yu, Tsai-Ying
DOI
zh-TW
Abstract
Earnings is one of the most important financial information. While the information content and value-relevance of accounting earnings are widely recognized, this paper wants to explore whether investors put as much emphasis on “quality” of earnings as they put on the amount of earnings.
This paper refers to the method mentioned in Francis, LaFond, Olsson and Schipper（2005）to carry out a research in Taiwan capital market. I found that the relation between earnings quality and cost of capital documented by Francis, LaFond, Olsson and Schipper（2005）in the U.S capital market also exists in Taiwan.
As Francis, LaFond, Olsson and Schipper（2005）, this paper provides large sample evidence on whether the equity and debt markets impound information about the quality of earnings with the financial and market data collected in Taiwan. I probe Taiwan enterprise cost of capital from three aspects: cost of debt, PE-ratio, and β obtained from one-factor CAPM. Totally seven metrics of earnings quality are derived from modified Jones model and the model suggested in Dechow and Dichiv(2002). The empirical results agree with Francis, LaFond, Olsson and Schipper(2005) and show the significant relation between earnings quality and costs of capital. Companies with higher earnings quality enjoy lower costs of capital.
The higher costs of capital born by lower-earnings-quality companies reflect the higher information risk facing their shareholders and debtors. The empirical relation between earnings quality and costs of capital suggests that the market does take the information of earnings quality revealed by the financial statements into consideration. However, we are still not sure whether the financial market has fully impound and fairly value the information of earnings quality.
Subjects
盈餘品質
資金成本
earnings quality
cost of capital
Type
other
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