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The Complementarity Between Segment Disclosure and Earnings Quality, and its Effect on Cost of Capital

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  • Belén Blanco

    ()
    (Universidad Carlos III Madrid)

  • Juan M. García

    ()
    (Universidad Carlos III Madrid)

  • Josep A. Tribó

    ()
    (Universidad Carlos III Madrid)

Abstract

We investigate the role of earnings quality in determining the levels of segment disclosure, and whether and how better quality earnings and segment disclosure influences cost of capital. Using a large US sample for the period 2001-2006, we find a positive relation between earnings quality and levels of segment disclosures. We also find that firms providing better quality segment information, contingent upon good earnings quality, enjoy lower cost of capital. We base our empirical tests on a self created index of segment disclosure. Our results contribute to a better understanding of (1) the incentives for providing segment disclosures, and (2) how accounting quality (quality of segment information and earnings quality) is related to the cost of capital.

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Bibliographic Info

Paper provided by Department of Business Economics, Universitat Autonoma de Barcelona in its series Working Paper with number 201005.

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Handle: RePEc:bbe:wpaper:201005

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Keywords: Segment disclosure; earnings quality; diversification; information; asymmetries; forecast error; cost of capital;

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