Disclosure Level, Earnings Quality and Cost of Capital
Date Issued
2009
Date
2009
Author(s)
Chen, Yu-Cheng
Abstract
This study investigates the relation between disclosure level, earnings quality and cost of equity capital. Prior literatures have generally documented a negative relation between disclosure level and cost of equity capital, as well as a negative relation between earnings quality and cost of equity capital. Following the concept of Francis et al. (2008), this study attempts to investigate whether the negative association between disclosure level and cost of equity capital still holds when earnings quality is taken into consideration in the Taiwan context. y using the disclosure ranking system by Security and Futures Institution of Taiwan as the disclosure level proxy, and earnings quality proxy derived basing on modified Jones model, this study finds disclosure level is significantly associated with cost of equity capital. The negative relation still holds after earnings quality is considered in the examination. Such findings are inconsistent with Francis et al. (2008), implying that there may be factors other than earnings quality that are considered in the pricing or incentive of firm disclosure under Taiwan context. Extending the examination with other measure of earnings quality, the finding is robust for the most transparent firms, but sensitive for firms in lower rankings of disclosure.
Subjects
Disclosure level
earnings quality
cost of equity capital
information risk
disclosure pricing
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