Cost of Capital and Earnings Transparency

By Mary E. Barth, Yaniv Konchitchki, Wayne R. Landsman. 2008

419 citations recorded by the source corpus.

We provide evidence that firms with more transparent earnings enjoy a lower cost of capital. We base our earnings transparency measure on the extent to which earnings and change in earnings covary contemporaneously with returns. We find a significant negative relation between our transparency measure and subsequent excess and portfolio mean returns, and expected cost of capital, even after controlling for previously documented determinants of cost of capital.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/26d0ad7fbde4b582e42dfef8eddb93874903a56c

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Citations in the corpus

Relevance of Differences Between Net Income Based on IFRS and Domestic Standards for European Firms (2012, positive): “Following prior research (Bushman et al. 2004; Francis et al. 2004; Barth et al. 2013), we assume that stock price captures the underlying economic value of the firm.”
Managerial Ability and Income Smoothing (2019, neutral): “Some regulators and academics hold the view that the most desirable property of earnings is transparency, in which changes in the economic value of a firm are immediately reflected in earnings through fair value accounting (Barth et al. 2013).”
The Relation Between Expected Returns, Realized Returns, and Firm Risk Characteristics* (2010, methodology): “…returns over the twelve months prior to the beginning of firm i’s fiscal year. rFF is calculated as an annualized predicted return computed using compounded monthly returns, consistent with Barth et al. 2010. rHL and rDKL The final two proxies we examine are averages of certain other proxies.”
Customer Concentration Risk and the Cost of Equity Capital (2016, methodology): “…on how various forms of information risk affect firms’ cost of equity, including voluntary financial and nonfinancial disclosure (Botosan, 1997; Dhaliwal et al., 2011; Francis et al., 2008), earnings transparency (Barth et al., 2013), and internal control quality (AshbaughSkaife et al., 2009).”
Company reputation and the cost of equity capital (2014, neutral): “Finally, higher reputation companies provide higher quality financial reports (Cao et al. 2012), and higher earnings quality can lower the cost of equity by reducing information asymmetry (Francis et al. 2004, 2005; Barth et al. 2013).”