Costs of Equity and Earnings Attributes
2004/10/01 by Jennifer Francis, Ryan LaFond, Per M. Olsson +2 · 2,480 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Accrual #Auditing, Earnings Management, Governance #Business #Cash flow #Cost of capital #Cost of equity #Earnings #Earnings quality #Earnings response coefficient #Econometrics #Economics #Equity (law) #Financial Markets and Investment Strategies #Financial Reporting and Valuation Research #Implicit cost #Microeconomics #Profit (economics) #Residual income valuation #Total cost #Volatility (finance)
paper · doi:10.2308/accr.2004.79.4.967
published in The Accounting Review 79(4), 967-1010 (American Accounting Association)
openalex publication_date 2004/10/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
Abstract
We examine the relation between the cost of equity capital and seven attributes of earnings: accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism. We characterize the first four attributes as accounting-based because they are typically measured using accounting information only. We characterize the last three attributes as market-based because proxies for these constructs are typically based on relations between market data and accounting data. Based on theoretical models predicting a positive association between information quality and cost of equity, we test for and find that firms with the least favorable values of each attribute, considered individually, generally experience larger costs of equity than firms with the most favorable values. The largest cost of equity effects are observed for the accounting-based attributes, in particular, accrual quality. These findings are robust to controls for innate determinants of the earnings attributes (firm size, cash flow and sales volatility, incidence of loss, operating cycle, intangibles use/intensity, and capital intensity), as well as to alternative proxies for the cost of equity capital.
Citations
Cited by
- Matching and the Changing Properties of Accounting Earnings over the Last 40 Years
- The Changing Landscape of Accrual Accounting
- International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?
- Effect of Analysts' Optimism on Estimates of the Expected Rate of Return Implied by Earnings Forecasts
- Accounting Information, Disclosure, and the Cost of Capital
- Voluntary Disclosure, Earnings Quality, and Cost of Capital
- The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
- Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most
- The impact of climate risk on firm performance and financing choices: An international comparison
- Data Sharing Platforms and Financial Market Stability: The Information Transparency Mechanism
- How Does Financial Reporting Quality Relate to Investment Efficiency
- Enterprise system implementation and cash flow volatility
- Understanding earnings quality: A review of the proxies, their determinants and their consequences
- The financial reporting environment: Review of the recent literature
- The implied cost of capital: A new approach
- Economic policy uncertainty and incentive to smooth earnings
- Climate risk: The price of drought
- The contracting benefits of accounting conservatism to lenders and borrowers
- Taming the Factor Zoo: A Test of New Factors
- Business sustainability performance and cost of equity capital
- Financial reporting quality, debt maturity and investment efficiency
- Does mandatory disclosure of firm’s tax avoidance position affect corporate investment efficiency?
- Volatility and Persistence of Value-Based Purchasing Adjustments: A Challenge to Integrating Population Health and Community Benefit Into Business Operations. [europepmc]
- Environmental Responsibility, Social Responsibility, and Governance from the Perspective of Auditors. [europepmc]
- Financial reporting quality of ESG firms listed in China. [europepmc]
- Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator. [europepmc]
- TARFA: A Novel Approach to Targeted Accounting Range Factor Analysis for Asset Allocation. [europepmc]
- Taking Information Seriously: A Firm-side Interpretation of Risk Factor Disclosure [europepmc]
Related