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

Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia Abstract: 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Finance & Accounting Wiley

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

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Publisher
Wiley
Copyright
© 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd
ISSN
0306-686X
eISSN
1468-5957
D.O.I.
10.1111/j.1468-5957.2008.02118.x
Publisher site
See Article on Publisher Site

Abstract

Abstract: 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.

Journal

Journal of Business Finance & AccountingWiley

Published: Jan 1, 2009

References

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