Download or read book Implied Cost of Capital and Accounting Conservatism written by Simon Ketterer and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book CONSERVATISM THE COST OF EQUITY CAPITAL AN INFORMATION PERSPECTIVE written by and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The bias implied by conservatism in accounting and its impact on information risk in equity markets is the subject of considerable debate. On one hand, opponents of conservatism believe that any kind of biased information is actually misinformation and thus increases uncertainty. Perhaps most prominent among opponents of conservatism is the Financial Accounting Standards Board (FASB). The FASB contends that accounting information should be neutralfree from bias; a bias in favor of reporting either good or bad news is inconsistent with representational faithfulness and neutrality. On the other hand, proponents of conservatism point to incentives of management to manipulate financial statements by exaggerating apparent good news and/or hiding apparent bad news. Proponents argue that the bias implied by conservatism is necessary to offset the asymmetric reporting incentives of the firms management, and in so doing, conservatism allegedly improves information quality and reduces information risk. Finally, results of at least one recent study do not favor either position, suggesting that conservatism has no effect on information quality in equity market. This study finds that the bias implied by conservatism (bias in favor of reporting bad news) increases information risk in equity markets and consequently the cost of equity capital. Findings further indicate that sufficiently aggressive bias also increases information risk. That is, the markets most aggressive firms, those reporting with a bias opposite that implied by conservatism, can reduce information risk by moving toward more neutral, unbiased reporting. Furthermore, the general effects of biased reporting (increased information risk) are consistent across all levels of information asymmetry among equity investors. These findings are interpreted as supporting the position of the FASB that biased accounting information increases information risk.
Download or read book Estimating the Cost of Capital Implied by Market Prices and Accounting Data written by Peter Easton and published by Now Publishers Inc. This book was released on 2009 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt: Estimating the Cost of Capital Implied by Market Prices and Accounting Data focuses on estimating the expected rate of return implied by market prices, summary accounting numbers, and forecasts of earnings and dividends. Estimates of the expected rate of return, often used as proxies for the cost of capital, are obtained by inverting accounting-based valuation models. The author describes accounting-based valuation models and discusses how these models have been used, and how they may be used, to obtain estimates of the cost of capital. The practical appeal of accounting-based valuation models is that they focus on the two variables that are commonly at the heart of valuations carried out by equity analysts -- forecasts of earnings and forecasts of earnings growth. The question at the core of this monograph is -- How can these forecasts be used to obtain an estimate of the cost of capital? The author examines the empirical validity of the estimates based on these forecasts and explores ways to improve these estimates. In addition, this monograph details a method for isolating the effect of any factor of interest (such as cross-listing, fraud, disclosure quality, taxes, analyst following, accounting standards, etc.) on the cost of capital. If you are interested in understanding the academic literature on accounting-based estimates of expected rate of return this monograph is for you. Estimating the Cost of Capital Implied by Market Prices and Accounting Data provides a foundation for a deeper comprehension of this literature and will give a jump start to those who have an interest in these topics. The key ideas are introduced via examples based on actual forecasts, accounting information, and market prices for listed firms, and the numerical examples are based on sound algebraic relations.
Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Download or read book Asset Management and Investor Protection written by Julian Ralph Franks and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Mention Enron or BCCI and a lack of financial regulation springs to mind. Consumer confidence is at a low ebb as consumers feel unprotected. This comparative survey of European and US consumer protection schemes offers detailed information on how much protection investors really have in these troubled times.
Download or read book The Effect of Conservatism on Cost of Capital written by Khalifa Maha and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to investigate the economic consequences of accounting conservatism in Middle Eastern and North Africa (MENA) economies. In particular, motivated by the lack of empirical tests concerning economic effects of conservatism in MENA countries, the paper examines the impact of conditional conservatism on firms' cost of equity capital and the effect of two mechanisms of conservatism: bad news recognition and good news recognition on cost of equity. The firm-year measure of conditional conservatism is calculated using Khan and Watts' (2009) model and the cost of equity capital is computed based on Estrada's (2000) approach. As predicted, we find evidence of a negative relation between conditional conservatism and cost of equity capital using a sample of companies pertaining to MENA emerging markets. We also find that the two mechanisms of conservatism reduce the cost of equity capital. The finding of this paper can be used by standard-setters to review their opinion about the beneficial effect of conservatism. This study presents the first attempt in MENA countries to provide empirical evidence on the effect of conditional conservatism on the cost of equity capital.
Download or read book Empirical Capital Structure written by Christopher Parsons and published by Now Publishers Inc. This book was released on 2009 with total page 107 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical Capital Structure reviews the empirical capital structure literature from both the cross-sectional determinants of capital structure as well as time-series changes.
Download or read book Conditional Conservatism and the Cost of Equity Capital written by Gary C. Biddle and published by . This book was released on 2017 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior studies report negative or insignificant relations between conditional conservatism and the cost of equity capital, arguing that conservatism reduces information risk. Using accounting-based conditional conservatism proxies, however, we find a significantly positive association between conditional conservatism and the cost of equity. This positive relation operates via improving information precision about negative earnings shocks and generally inflating information asymmetry among investors, both of which increase the cost of equity. We further find that the cost of equity effect of conditional conservatism disappears in the period after the enactment of the Sarbanes-Oxley Act (SOX), consistent with the notion that nationwide improvement of information precision about negative news and diminished information asymmetry are engendered by the SOX regulation. This study adds to researches on conditional conservatism, SOX, and the cost of equity, and also has policy implications.
Download or read book Accounting for Risk written by Stephen Penman and published by . This book was released on 2021-11-11 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt: Accounting for Risk is about using accounting information to assess risk and the required return for bearing that risk. The focus is on investing in firms and the equity claims on firms: How much should an investor discount the price of a share in a firm for risk, and how can accounting information help to answer that question? That discount is variously called the required return, the expected return, or the cost of capital. The monograph links two strands of research - the first is accounting-based valuation research where value is assessed from expected cash flows, earnings, or residual earnings. The focus has been on forecasting those payoffs however forecasting payoffs is only one part of valuation. The other issue is how those expected payoffs should be discounted for risk. This monograph engages the question whether accounting information aid in the determination of risk and the discount rate? The second strand of research is asset pricing. While "asset pricing" might suggest this research is involved in determining prices, it is actually in pursuit of the required return to investing - the risk discount to price. Can accounting information about risk and return be utilized in building operational pricing models? Accounting for Risk also enhances financial statement analysis. While traditional financial statement analysis--ratio analysis--was conducted without much reference to finance theory, modern financial statement analysis derives from accounting-based valuation models that are based on the no-arbitrage theory on the pricing of expected dividends. That brings accounting and finance closer together. The key is an understanding of the accounting principles underlying the recognition and measurement in the financial statements. This requires an appreciation of how accounting handles risk, thereby generating accounting numbers that convey information about risk and expected return.
Download or read book Cost of Capital written by Shannon P. Pratt and published by John Wiley & Sons. This book was released on 2014-03-12 with total page 1344 pages. Available in PDF, EPUB and Kindle. Book excerpt: A one-stop shop for background and current thinking on the development and uses of rates of return on capital Completely revised for this highly anticipated fifth edition, Cost of Capital contains expanded materials on estimating the basic building blocks of the cost of equity capital, the risk-free rate, and equity risk premium. There is also discussion of the volatility created by the financial crisis in 2008, the subsequent recession and uncertain recovery, and how those events have fundamentally changed how we need to interpret the inputs to the models we use to develop these estimates. The book includes new case studies providing comprehensive discussion of cost of capital estimates for valuing a business and damages calculations for small and medium-sized businesses, cross-referenced to the chapters covering the theory and data. Addresses equity risk premium and the risk-free rate, including the impact of Federal Reserve actions Explores how to use Morningstar's Ibbotson and Duff Phelps Risk Premium Report data Discusses the global cost of capital estimation, including a new size study of European countries Cost of Capital, Fifth Edition puts an emphasis on practical application. To that end, this updated edition provides readers with exclusive access to a companion website filled with supplementary materials, allowing you to continue to learn in a hands-on fashion long after closing the book.
Download or read book The Implied Cost of Capital written by Stephen H. Penman and published by . This book was released on 2020 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Calculations of the Implied Cost of Capital (ICC) typically fail on validation criteria. This paper provides an explanation. Though nominally working with accounting-based valuation models, the standard approach fails to recognize accounting principles that govern the accounting. Those principles incorporate risk, yielding expected earnings growth that informs about that risk and the corresponding cost of capital. By inserting growth rates into the ICC calculation without this consideration, the ICC fails an accounting consistency condition. Methods that estimate the ICC and growth jointly do not provide a remedy. The paper lays out this critique and provides empirical support.
Download or read book Commentary on Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns written by Charles C. Y. Wang and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The expected rate of equity returns is a central input into various managerial and investment decisions that affect the allocation of scarce resources. Research on capital markets has devoted significant effort to studying how and why expected returns vary over time and across firms. Cochrane (2011) called these questions the central organizing agenda in contemporary asset-pricing research.At the heart of this research agenda lies a longstanding measurement problem: ex-ante expected returns are unobservable and ex-post realized returns are noisy proxies (Campbell, 1991; Vuolteenaho, 2002). Since Botosan (1997), the accounting literature offered a promising solution to this measurement problem: the development of a novel class of expected-return proxies (ERPs), collectively known as the implied cost of equity capital (ICC).
Download or read book Earnings Management Conservatism and Earnings Quality written by Ralf Ewert and published by . This book was released on 2012 with total page 142 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings Management, Conservatism, and Earnings Quality reviews and illustrates earnings management, conservatism, and their effects on earnings quality in an economic modeling framework. Both earnings management and conservative accounting introduce biases to financial reports. The fundamental issue addressed is what economic effects these biases have on earnings quality or financial reporting quality. Earnings Management, Conservatism, and Earnings Quality reviews analytical models of earnings management and conservatism and shows that both can have beneficial or detrimental economic effects, so a differentiated view is appropriate. Earnings management can provide additional information via the financial reporting communication channel, but it can also be used to misrepresent the firm's position. What the authors find is that similar to earnings management, conservatism can reduce the information content of financial reports if it suppresses relevant information, but it can be a desirable feature that improves economic efficiency. The approach to study earnings management, conservatism, and earnings quality is based on the information economics literature. A variety of analytical models are reviewed that capture the effects and subtle interactions of managers' incentives and rational expectations of users. The benefit of analytical models is to make precise these, often highly complex, strategic effects. They offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. The monograph is organized around a few basic model settings, which are presented in simple versions first and then in extensions to elicit the main insights most clearly. Chapter 2 presents the basic rational expectations equilibrium model with earnings management and rational inferences by the capital market. Chapter 3 is devoted to earnings quality and earnings quality metrics used in many studies. Chapter 4 studies conservatism in accounting. Finally, the authors examine the interaction between conservatism and earnings management. Each chapter ends with a section containing a summary of the main findings and conclusions.
Download or read book The world price of earnings opacity written by Uptal Bhattacharya and published by . This book was released on 2002 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Effect of Impairment Testing Disclosures on the Cost of Equity Capital written by Luc Paugam and published by . This book was released on 2015 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Information risk - the uncertainty regarding the parameters of the distribution of firms' future cash flows - generates valuation errors and is costly to investors who require a higher return to compensate for greater information risk. We argue that, on average, through their impairment-testing disclosures managers convey information that reduces information risk. Using disclosures of firms included in the SBF 250 index of Euronext Paris over the period 2006-2009, we document a negative association between impairment-testing disclosures and implied cost of equity capital. We find that prospective entity-specific impairment-testing disclosures are negatively associated with cost of capital whereas descriptive disclosures exhibit no association with cost of capital. Additionally, we document that firms which avoid booking impairments when low performance indicators suggest a greater likelihood of impairments exhibit no association between impairment-testing disclosures and cost of capital. This suggests that those firms' disclosures are perceived as less accurate by investors. We also find that prospective impairment-testing disclosures are negatively related to analysts' forecast errors. Our study adds to the literature on the economic consequences of financial reporting and sheds light on the consequences of one accounting mechanism, namely impairment-testing disclosures, ensuring conservatism of financial reporting.
Download or read book Individual Behaviors and Technologies for Financial Innovations written by Wesley Mendes-Da-Silva and published by Springer. This book was released on 2018-07-26 with total page 395 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book offers comprehensive examination of research on the relevance of individual behavior and technology to financial innovations. The chapters cover current topics in finance including integrated reporting, people finance, crowdfunding, and corporate networks. It provides readers with an organized starting point to explore individual behaviors and new technologies used in financial innovations. The explicit and growing speed of the spread of new technologies has hastened the emergence of innovation in the field of finance. Topics like the Internet of Things, semantic computing and big data finance are motivating the construction of financial tools that translate into new financial mechanisms. This book strives help readers better understand the dynamic of the changes in financial systems and the proliferation of financial products. Individual Behaviors and Technologies for Financial Innovations is organized in 16 chapters, organized in three parts. Part I has eight chapters that review the research on gender differences in attitudes about risk and propensity to purchase automobile insurance, financial literacy models for college students, wellness and attitude of university students in the use of credit cards, impact of programs income distribution and propensity to remain in employment, financial literacy and propensity to resort to informal financing channels, risk behavior in the use of credit cards by students. Part II reviews the research on financing for startups and SMEs, exploring funding through crowdfunding platform, operating credit unions, and using networks of friends to finance small businesses outside the domestic market. The four chapters of Part III describe contexts of financial innovation in listed companies, including society's demands on their behavior - we discuss motivations for companies to participate in corporate sustainability indexes, corporate performance through their profile of socially responsible investments, influence of networks of social relations in the formation of boards, and management of companies, and also the precariousness of financial decisions in large companies, as well as the role of the internet in corporate communication with the market.
Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:
