Download or read book Conservatism Disclosure and the Cost of Equity Capital written by Tracy Charmaine Artiach and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study seeks insights into the economic consequences of accounting conservatism by examining the relation between conservatism and cost of equity capital. Appealing to the analytical and empirical literatures, we posit an inverse relation. Importantly, we also posit that the strength of the relation is conditional on the firm's information environment, being the strongest for firms with high information asymmetry and the weakest (potentially negligible) for firms with low information asymmetry. Based on a sample of US-listed entities, we find, as predicted, an inverse relation between conservatism and the cost of equity capital, but further, that this relation is diminished for firms with low information asymmetry environments. This evidence indicates that there are economic benefits associated with the adoption of conservative reporting practices and leads us to conclude that conservatism has a positive role in accounting principles and practices, despite its increasing rejection by accounting standard setters.

Download or read book The Effect of Financial Reporting Conservatism and Disclosure on the Cost of Equity Capital written by Martin Artiach and published by . This book was released on 2008 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 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 Conservatism Cost of Capital and Fraudulent Financial Reporting written by Karin A. Petruska and published by . This book was released on 2008 with total page 274 pages. Available in PDF, EPUB and Kindle. Book excerpt: Accounting conservatism is often described as an equilibrium reaction used to moderate a decrease in value resulting from information asymmetry, uncertainty, or private information that occurs between investors and managers (LaFond and Watts, 2008). Although a qualitative characteristic of the FASB conceptual framework, standard setters have addressed concerns that accounting conservatism may lack neutrality and can lead to biased firm reporting that misrepresents economic conditions. Based on the theoretical framework of litigation proposed by Watts (2003), I address whether firms with higher thresholds of litigation risk are inclined to use higher levels of asymmetric timeliness as a choice in reducing information asymmetry. The motivation for this study is to extend the concept of accounting conservatism to a setting that investigates firms with egregious levels of litigation risk to determine if they exhibit higher levels of accounting conservatism. In terms of regulation, the Sarbanes-Oxley Act was enacted to increase transparency and disclosure in financial reporting and represents a more transparent shift in the information environment. I examine whether the asymmetric timeliness of earnings and firm-specific measures of accounting conservatism are more pronounced for alleged fraud firms in the post-SOX period, when litigation risk is expected to increase. In terms of standard setting, I examine if goodwill impairment is higher for firms accused of alleged fraudulent activity and whether these firms utilizing goodwill impairment maintain a higher degree of accounting conservatism. I investigate whether accounting conservatism, as a disclosure mechanism, can mitigate an increase in the cost of equity capital, even under the auspices of alleged fraud. Additionally, this study addresses the issue of whether there are contagion effects of asymmetric timeliness for firms in similar industries as the alleged fraud firms. The results suggest that the threat of litigation for alleged fraud firms invokes a higher degree of asymmetric timeliness surrounding the alleged fraud manipulation date in the financial statements vis-á-vis a control sample and is driven by the accrual component of earnings. The degree of asymmetric timeliness of earnings remains higher in the post-SOX period for alleged fraud firms. However, the relation between firm-specific measures of accounting conservatism and the post-SOX period vary depending on the measure used. Goodwill impairment is higher for firms accused of alleged fraudulent activity and the asymmetric timeliness of earnings is greater for alleged fraud firms that utilize goodwill impairment. The relation between accounting conservatism and the cost of equity capital varies as to the measure used to construct the cost of equity capital. This suggests that firms are not able to influence the cost of equity capital through a more conservative disclosure policy. Also, there do not appear to be industry contagion effects. The findings lend support as to the role of accounting conservatism and why the FASB should continue to monitor its increasing effects. The results can provide support to investors, analysts, and academicians in adjusting for the effects of conservatism and to auditors in understanding how accounting conservatism could be used by firms and the multiple ways that it can be measured.

Download or read book Disaggregation in Mandatory Risk Disclosure Audit Conservatism and Implied Cost of Equity Capital written by Ahmed Alhadi and published by . This book was released on 2014 with total page 2 pages. Available in PDF, EPUB and Kindle. Book excerpt: This research investigates the association between discretionary disaggregation in mandatory risk disclosures, audit conservatism and the implied cost of capital (ICOE). Based on a sample of 141 financial firms from six GCC countries over the 2007-2011 period, we find that the ICOE is significantly negatively associated with discretionary disaggregation in mandatory market risk disclosures after controlling for firm-specific characteristics and country-specific institutional factors. Further, our interaction term between audit conservatism and firms' disaggregation in mandatory risk disclosures is negatively associated with the ICOE, particularly for small to medium size firms. These findings are robust to a series of sensitivity tests. Collectively, these results demonstrate that more discretionary disaggregation in risk disclosure provides more private information to investors.

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 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 Disclosure Interactions and the Cost of Equity Capital written by Marco Trombetta and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to provide some new evidence on the relationship between disclosure and the cost of equity capital. We propose a new specification for the empirical test based on the idea that in the previous models one crucial variable was missing: accounting policy choice. We test our theoretical hypothesis using a sample of Spanish firms quoted on the Spanish continuous market from 1999 to 2002. We adopt the ex-ante approach to measure the cost of equity capital, taking analysts predictions as a proxy for expected earnings. As an explanatory variable we use an index measuring annual report disclosure quality. This measure of disclosure is combined with a proxy for the accounting policy choice of the firm. We measure firms' conservatism using the modified Jones model of Dechow et al. (1995) to estimate discretionary accruals. Our results confirm that the relationship between disclosure and cost of capital is affected by the choice of accounting policy.

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 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 The impact of improved financial disclosure on the cost of equity capital written by Dan S. Dhaliwal and published by . This book was released on 1978 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Economic Applications of Quantile Regression written by Bernd Fitzenberger and published by Springer Science & Business Media. This book was released on 2013-03-09 with total page 325 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quantile regression has emerged as an essential statistical tool of contemporary empirical economics and biostatistics. Complementing classical least squares regression methods which are designed to estimate conditional mean models, quantile regression provides an ensemble of techniques for estimating families of conditional quantile models, thus offering a more complete view of the stochastic relationship among variables. This volume collects 12 outstanding empirical contributions in economics and offers an indispensable introduction to interpretation, implementation, and inference aspects of quantile regression.

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:

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 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 Management Through Accounts written by James Harris Bliss and published by . This book was released on 1924 with total page 880 pages. Available in PDF, EPUB and Kindle. Book excerpt: