2134/23405
Yasser Eliwa
Yasser
Eliwa
Jim Haslam
Jim
Haslam
Santhosh Abraham
Santhosh
Abraham
The association between earnings quality and the cost of equity capital: Evidence from the UK
Loughborough University
2016
Earnings quality
Accruals quality
The cost of equity
Financial crisis
Law
Business and Management not elsewhere classified
2016-12-09 11:34:31
Journal contribution
https://repository.lboro.ac.uk/articles/journal_contribution/The_association_between_earnings_quality_and_the_cost_of_equity_capital_Evidence_from_the_UK/9504764
This study examines the association between earnings quality and the cost of
equity in the United Kingdom (UK) over the time period 2005-2011. This setting and time
period enables us to examine the effect of IFRS based earnings on the pricing of earnings
quality and how this relation is influenced by a period of severe macro-economic turbulence
as in the case of the recent global financial crisis. We find a significant negative association
between each accounting-based earnings quality proxy considered separately and the cost of
equity. Our results also indicate that during the financial crisis the relationship between
earnings quality and cost of equity becomes more prominent than in the pre-crisis period.
This strengthening of the relationship during a period of macro-economic turbulence shows
the importance investors place on earnings quality as a measure of risk. Our results also
document that investors place more importance on the innate component of accruals quality
than on the discretionary component. These results should be reassuring to US standard
setters who are considering adopting or converging to IFRS.