Accounting-based downside risk, cost of capital, and the macroeconomy

Accounting-based downside risk, cost of capital, and the macroeconomy We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we find that, relative to low earnings downside risk firms, high earnings downside risk firms experience more negative operating performance over the subsequent period, are more sensitive to downward macroeconomic states, and are more strongly linked to earnings attributes and other risk-related measures from prior research. In line with our prediction, we also find that earnings downside risk explains variation in firms’ cost of capital, and that this link between earnings downside risk and cost of capital is incremental to several earnings attributes, accounting and risk factor betas, return downside risk, default risk, earnings volatility, and firm fundamentals. Overall, this study contributes to accounting research by demonstrating the key valuation and risk assessment roles of earnings downside risk derived from firms’ financial statements, also shedding new light on the link between accounting and the macroeconomy. Review of Accounting Studies Springer Journals

Accounting-based downside risk, cost of capital, and the macroeconomy

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Springer US
Copyright © 2015 by Springer Science+Business Media New York
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance & Economics
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