Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia

By P. Gray, Ping-Sheng Koh, Y. H. Tong. 2009

202 citations recorded by the source corpus.

Recent theoretical work argues that information risk is a non-diversifiable risk factor that is priced in the capital market. Using accruals quality to proxy for information risk, Francis et al. (2005) provide empirical support for this argument using a sample of US firms. This paper re-examines the interplay of accruals quality, information risk and cost of capital in Australia, where a number of important institutional and regulatory differences are hypothesized to affect the relation between accruals quality and cost of capital. The results suggest that, while accruals quality impacts on the cost of capital for Australian firms, some salient differences exist. In contrast to findings for US firms, the costs of debt and equity for Australian firms are largely influenced by accruals quality arising from economic fundamentals (i.e., innate accrual quality) but not discretionary reporting choices (i.e., discretionary accrual quality). This finding is consistent with our predictions based on the Australian institutional and regulatory environment. In addition, using both the asset pricing tests in Francis et al. (2005) and Core et al. (2008), we provide evidence consistent with accruals quality being a priced risk factor.

Subfields: Accounting, Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/02651a0c2f2e01fb3ec3c32e54a6365f68653b2c

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Isabel‐María García‐Sánchez
2. Jennifer Martínez‐Ferrero
3. Yasser Eliwa
4. Ahmed Saleh
5. Shantanu Banerjee

In Economics and Econometrics

1. Yasser Eliwa
2. Isabel‐María García‐Sánchez
3. Jennifer Martínez‐Ferrero
4. Ahmed Saleh
5. Shantanu Banerjee

In Strategy and Management

1. Jennifer Martínez‐Ferrero
2. Isabel‐María García‐Sánchez
3. Shantanu Banerjee
4. Yasser Eliwa
5. Ahmed Saleh
6. Patrick Velte
7. A. Gerged

Citations in the corpus

• ESG practices and the cost of debt: Evidence from EU countries (2019, methodology): “Moving to control variables, we find that the signs of their coefficients are largely consistent with findings in the existing literature (e.g., Francis et al., 2005; Gray et al., 2009; Erragragui, 2017).”
• Corporate Life Cycle and Cost of Equity Capital (2015, unknown): “For example, Gray et al. (2009) used industry-adjusted earnings-to-price ratios and Monkhouse (1993) used the capital asset pricing model (CAPM) to estimate the cost of equity.”
• Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices (2014, result): “We expect to find a positive relationship between EM practices and cost of capital in line with earlier studies by Francis et al. (2004, 2005), Gray et al. (2009), and Blanco et al. (2009): H1a Earnings management practices increase the cost of capital.”