Earnings Quality Choices: Proprietary Costs and the Cost of Capital
Date Issued
2006
Date
2006
Author(s)
Cheng, Su-Ting
DOI
zh-TW
Abstract
“Earnings” is one of the most important financial information. Even though it is one of the mandatory disclosure items, managers can still use their discretion about when to recognize revenue and expense and about the application choices of accounting principles. This paper bases on the Modified Dechow & Dichev Model (McNichols 2002) to measure the earnings quality indicator. This model mapped earnings quality by the magnitude of accrual estimation errors. I use this indicator to explore managers’ disclosure behavior.
I consider the associated costs determinants that may affect a firm’s disclosure decisions and put the emphasis on proprietary costs. Proprietary costs take place when a firm discloses some information will reduce the present value of cash flows of the firm. The evidence I present suggests that reporting strategy depends not only on the valuation benefits from capital market firms expect to derive from disclosure, but also on the proprietary costs firms face. I find that higher proprietary costs are associated with poor earnings quality.
As for the research on the relationship between earnings quality and the cost of capital, I refer to Cohen’s method (2003) which took a vector of determinants variables as instrument variables to solve the endogeneity bias in the relation between cost of capital and disclosure policy. After considering costs (increasing a firm’s proprietary costs) and benefits (lower a firm’s cost of capital) of higher level of disclosure, I do not find evidence that firms choosing to provide high-quality earnings necessarily enjoy a lower cost of equity capital. My analysis implies that the information risk associated with the earnings quality does not necessarily constitute an additional risk factor, but rather is a firm-specific risk, which investors do not price.
Subjects
盈餘品質
資金成本
內生性
Earnings Quality
Proprietary Cost
Cost of Capital
Endogeneity
Type
thesis