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Cross-Sectional Determinants of Information Quality Proxies and Cost of Capital Measures

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  • Michelle Liu

    (Department of Economics 695 Park Avenue, HW 15th Floor, New York, NY 10065, USA)

  • Peter Wysocki

    (School of Business Administration 5250 University Drive, KE 308, Coral Gables, FL 33146-6531, USA)

Abstract

This paper examines the source of the documented empirical link between measures of “accruals quality” and a firm’s cost of capital. First, we argue that when regressions include accruals quality and operating volatility as determinants, these highly correlated measures capture different underlying constructs. Second, we find that in such regressions, the accruals quality measure displays inconsistent associations, while operating volatility variables display robust associations, with various cost of capital measures. Third, we provide research design suggestions to disentangle the effect of accruals quality from operating volatility, and we show how this method leads to less noisy coefficient estimates. These findings should be useful in designing empirical tests of the hypothesized associations involving accruals quality, operating volatility, and cost of capital.

Suggested Citation

  • Michelle Liu & Peter Wysocki, 2017. "Cross-Sectional Determinants of Information Quality Proxies and Cost of Capital Measures," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-33, June.
    • Handle: RePEc:wsi:qjfxxx:v:07:y:2017:i:02:n:s2010139216500166
    DOI: 10.1142/S2010139216500166
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    References listed on IDEAS

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    2. Kyoungwon Mo & Kyung Yun (Kailey) Lee, 2019. "Analyst Following, Group Affiliation, and Labor Investment Efficiency: Evidence from Korea," Sustainability, MDPI, vol. 11(11), pages 1-19, June.
    3. Nezlobin, Alexander & Sloan, Richard G. & Giedt, Jenny Zha, 2022. "Construct validity in accruals quality research," LSE Research Online Documents on Economics 112165, London School of Economics and Political Science, LSE Library.
    4. Rajkovic, Tijana, 2020. "Lead independent directors and investment efficiency," Journal of Corporate Finance, Elsevier, vol. 64(C).
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    6. Kai Du & Xin Daniel Jiang, 2020. "Connections between the Market Pricing of Accruals Quality and Accounting‐Based Anomalies," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2087-2119, December.
    7. Stefano Mengoli & Federica Pazzaglia & Sandro Sandri, 2020. "Family firms, institutional development and earnings quality: does family status complement or substitute for weak institutions?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(1), pages 63-90, March.

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