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Do Investors Price Accruals Quality? A Reexamination in the Implied Cost of Equity Capital *
Author(s) -
Hwang LeeSeok,
Lim SeungYeon
Publication year - 2012
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2012.01079.x
Subject(s) - accrual , equity (law) , cost of capital , stock (firearms) , economics , monetary economics , implicit cost , business , financial economics , econometrics , microeconomics , finance , earnings , total cost , profit (economics) , mechanical engineering , political science , law , engineering
This study investigates whether accruals quality (AQ) influences the expected returns of stock investors. We employ estimates of the implied cost of equity capital (ICOE) as the expected returns of stock investors because they are well specified ex ante without the need for noisy realized returns. Extending a current debate on AQ pricing, we control for several properties of analysts’ forecasts and find that AQ is positively and significantly related to ICOE. In addition, AQ is more closely related to the innate component than to the discretionary component. However, even after controlling for innate factors, we find that investors also price the discretionary component. Finally, we show that the relationship between AQ and ICOE is more pronounced for firms in poor information environments, such as small firms and firms with a low analyst following, implying that a firm’s information environment influences the relationship between AQ and ICOE.