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Cost of Capital and Earnings Transparency

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  • Barth, Mary E.

    (Stanford University)

  • Konchitchki, Yaniv

    (University of Southern California, Los Angeles)

  • Landsman, Wayne R.

    (University of North Carolina, Chapel Hill)

Abstract

We provide evidence that firms with more transparent earnings enjoy a lower cost of capital. We develop an earnings transparency measure that captures cross-sectional and intertemporal variation in the extent to which earnings and change in earnings covary contemporaneously with stock returns. We find that firms with more transparent earnings have a lower cost of capital as reflected in cross-sectional variation in subsequent excess returns and mean differences in returns, after controlling for the Fama-French and momentum factors. We also find that more transparent earnings are significantly negatively associated with expected equity cost of capital. Prior research reports a significant relation between a value relevance measure, which bears some resemblance to our earnings transparency measure, and cost of capital. We show that these relations are not significant after correcting for cross-sectional correlation in residuals, which is consistent with the measure used in prior research lacking intertemporal variation.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2015.

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Date of creation: Dec 2008
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Handle: RePEc:ecl:stabus:2015

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Cited by:
  1. Orie Barron & Xuguang Sheng & Maya Thevenot, 2013. "Information Environment and The Cost of Capital," Working Papers 2013-003, The George Washington University, Department of Economics, Research Program on Forecasting.
  2. Kim, Abby, 2014. "The value of firms' voluntary commitment to improve transparency: The case of special segments on Euronext," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 342-359.
  3. Xuguang Sheng & Orie Barron & Maya Thevenot, 2012. "Information Environment and the Cost of Capital: A New Approach," Working Papers 2012-12, American University, Department of Economics.
  4. Konchitchki, Yaniv, 2011. "Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices," MPRA Paper 52928, University Library of Munich, Germany.
  5. Lucian MUNTEANU, 2011. "Cost Of Equity, Financial Information Disclosure, And Ifrs Adoption: A Literature Review," Internal Auditing and Risk Management, Athenaeum University of Bucharest, vol. 24(4), pages 67-80, december.

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