Comparability and Cost of Equity Capital

2017 ◽  
Vol 31 (2) ◽  
pp. 125-138 ◽  
Author(s):  
Michael J Imhof ◽  
Scott E. Seavey ◽  
David B. Smith
Keyword(s):  
Lower Cost ◽  
Financial Statements ◽  
Equity Capital ◽  
Financial Accounting ◽  
Financial Statement ◽  
Imperfect Markets ◽  
Accounting Quality ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Investment Opportunities

SYNOPSIS We investigate how the comparability of a company's financial statements is related to its cost of equity capital. The Financial Accounting Standards Board's (FASB 2010) Statement of Financial Accounting Concept No. 8 proposes that comparability is a key tenet of accounting because it allows users of financial statements to benchmark a firm against similar firms when distinguishing between alternative investment opportunities. We provide evidence that greater financial statement comparability is associated with lower cost of equity capital, and show that comparability's effect on cost of equity remains after controlling for within-firm accounting quality. Additionally, we find that investors derive greater benefits from financial statement comparability in firms whose information environments are less transparent (high information asymmetry) and whose equity shares trade in markets that are less competitive (imperfect markets). Our findings contribute to accounting research by providing evidence justifying comparability as a separate element of the FASB's conceptual framework.

scholarly journals Impact of Corporate Political Connections on Cost of Equity: A Dynamic Panel Approach

2021 ◽  
Vol 13 (3) ◽  
pp. 45-65
Author(s):  
Aamir Amanat ◽  
Ahmed Imran Hunjra ◽  
Salman Ali Qureshi ◽  
Muhammad Hanif ◽  
Muhammad Razzaq Athar
Keyword(s):  
Lower Cost ◽  
Stock Exchange ◽  
Generalized Method Of Moments ◽  
Equity Capital ◽  
Political Connections ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Financing Cost ◽  
Corporate Political Strategies ◽  
The Impact

We analyze the impact of corporate political connections on the cost of equity of non-financial firms listed at the Pakistan Stock Exchange. We extract data from the DataStream and Election Commission of Pakistan for the years 2001 to 2018. The Generalized Method of Moments is used for data analysis. This research finds that firms use political connections to enjoy a lower cost of equity capital. Further, firms with strong ties to political power obtain more benefits on financing cost as compared to non-connected firms. Besides, we also find that firms affiliated with a large business group enjoy a lower cost of equity than non-affiliated connected firms. The findings may be helpful for regulators to formulate suitable policies concerning the use of corporate political strategies and to assist unconnected and non-affiliated firms to access finance easily.

Earnings Smoothness, Average Returns, and Implied Cost of Equity Capital

2010 ◽  
Vol 85 (1) ◽  
pp. 315-341 ◽  
Author(s):  
John McInnis
Keyword(s):  
Stock Returns ◽  
Lower Cost ◽  
Cost Of Capital ◽  
Empirical Work ◽  
Earnings Forecasts ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Implied Cost Of Capital ◽  
Earnings Smoothness

ABSTRACT: Despite a belief among corporate executives that smooth earnings paths lead to a lower cost of equity capital, I find no relation between earnings smoothness and average stock returns over the last 30 years. In other words, owners of firms with volatile earnings are not compensated with higher returns, as one would expect if volatile earnings lead to greater risk exposure. Although prior empirical work links smoother earnings to a lower implied cost of capital, I offer evidence that this link is driven primarily by optimism in analysts' long-term earnings forecasts. This optimism yields target prices and implied cost of capital estimates that are systematically too high for firms with volatile earnings. Overall, the evidence is inconsistent with the notion that attempts to smooth earnings can lead to a lower cost of equity capital.

scholarly journals Equity-Based Compensation For Outside Directors And Cost Of Equity Capital

2013 ◽  
Vol 30 (1) ◽  
pp. 15 ◽  
Author(s):  
Induck Hwang ◽  
Hyungtae Kim ◽  
Sangshin Pae
Keyword(s):  
Lower Cost ◽  
Negative Relationship ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Outside Directors ◽  
Total Compensation ◽  
The Cost ◽  
Implied Cost Of Equity

<p>This study provides evidence on the association between equity-based compensation for outside directors and the implied cost of equity capital. Based on the premise that equity-based compensation for outside directors better aligns the interests of the directors with those of shareholders, we investigate whether the more equity-based compensation is granted to outside directors, the lower cost of equity capital firms enjoy. We find a negative relationship between the proportion of equity-based compensation to total compensation for outside directors and the cost of equity capital. Our findings suggest that equity-based compensation for outside directors, by motivating the directors to play their monitoring role more faithfully, reduces agency risks resulting in the lower cost of equity capital.</p>

Business Strategy and the Cost of Equity Capital: An Evaluation of Pure versus Hybrid Business Strategies

2018 ◽  
Vol 31 (2) ◽  
pp. 111-141 ◽  
Author(s):  
Mehdi Khedmati ◽  
Edwin KiaYang Lim ◽  
Vic Naiker ◽  
Farshid Navissi
Keyword(s):  
Product Differentiation ◽  
Business Strategy ◽  
Lower Cost ◽  
Equity Capital ◽  
Business Strategies ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Cost Leadership ◽  
Pure Product ◽  
The Cost

ABSTRACT We examine the effect of pure (product differentiation or cost leadership) versus hybrid (a mix of product differentiation and cost leadership) business strategies on the cost of equity capital. Our results suggest that firms with a pure, relative to a hybrid, business strategy have a significantly lower cost of equity, and the cost of equity effect is equally driven by pure product differentiation and pure cost leadership strategies. We also find that firms following a pure business strategy are associated with lower systematic risk. Further, the lower cost of equity effect of a pure product differentiation strategy is more pronounced in high-technology industries and in regions with greater innovative capital. Our findings are robust to an array of robustness checks including change specification regressions and various methods for addressing endogeneity. Data Availability: All data used in this study are publicly available from the sources identified in the paper.

Does integration lead to lower costs of equity?

2016 ◽  
Vol 42 (1) ◽  
pp. 86-112
Author(s):  
Jessica Dye ◽  
Aaron Gilbert ◽  
Gail Pacheco
Keyword(s):  
Empirical Evidence ◽  
Market Integration ◽  
Lower Cost ◽  
World Market ◽  
Equity Market ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Market Conditions ◽  
Firm Level

Recent evidence has suggested that the benefits of equity market integration may not be shared equally by all firms. Making use of a firm-level measure of integration we investigate whether one of the documented benefits of equity market integration, lower cost of equity capital (COEC), holds for all Australian firms. Empirical evidence suggests that the degree of integration is reflected in firm COEC, albeit not in the expected way. Our results indicate that increased integration at the firm level leaves firms exposed to higher COEC when world market conditions are volatile.

The impact of mandatory IFRS adoption on capital markets: evidence from Korea

2018 ◽  
Vol 26 (1) ◽  
pp. 38-58 ◽  
Author(s):  
Saerona Kim ◽  
Haeyoung Ryu
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Joint Effect ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Ifrs Adoption ◽  
The Cost ◽  
The Impact

Purpose The purpose of this paper is to examine the effects of adoption of the mandatory International Financial Reporting Standards (IFRS) on the cost of equity capital in a unique Korean setting. In Korea, individual financial statements were taken as primary financial statements. Before the adoption of IFRS, consolidated financial statements were taken as supplementary financial statements. Design/methodology/approach The authors measure the cost of equity using the average estimates from the implied cost of capital models proposed by Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004) and Ohlson and Juettner-Nauroth (2005), using it as the primary dependent variable. Mandatory IFRS adoption, the independent variable in this study, is assigned a value of 1 for the post-adoption period and 0 otherwise. Findings Using a sample of listed Korean companies during the period from 2000 to 2013, the authors find evidence of a significant reduction in the cost of equity capital in Korean listed companies after mandatory adoption of the IFRS in 2011, after controlling for a set of market variables. Originality/value This study is one of a growing body of literature on the relations between mandatory IFRS adoption and the cost of equity capital (Easley and O’Hara 2004; Covrig et al. 2007; Lambert et al. 2007; Daske et al. 2008). According to the results of this study, increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have had a joint effect on the cost of equity capital, leading to a large decrease in expected equity returns.

Impact of International Financial Reporting Standards on Cost of equity Capital for Asian countries

2014 ◽  
Vol 1 (1) ◽  
pp. 148 ◽  
Author(s):  
Prof. Archana Patro ◽  
Prof. V. K. Gupta
Keyword(s):  
Hong Kong ◽  
Financial Reporting ◽  
Financial Statements ◽  
Equity Capital ◽  
Economic Consequences ◽  
Data Sets ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Asian Countries ◽  
Financial Reporting Standards

The present study examines whether adoption of IFRS reduces Cost of equity Capital for firms in Asia. The sample consists of firms from four Asian Countries, namely China, Hong Kong, Israel and Philippines, where IFRS has been made mandatory. Data for six years covering the period from 2006-2011 has been taken for analysis. Different types of panel data estimates were used and compared so as to interpret the results with the best suited parameters for different data sets for different countries. The results vary for different countries. The firms in Hong Kong and Philippines get benefit from the reduction in their cost of equity capital after adopting IFRS, but for firms in China and Israel cost of equity capital increased. It is also evident from the study that other firm specific control variables have no impact on cost of equity capital. The study contributes to the understanding of economic consequences of adopting IFRS across Asian countries. The findings would be important not only to countries that have already adopted IFRS, but also to countries that are in the process of adopting the standard. The outcomes will have important implications for the regulators, practitioners, academicians and auditors, as well as end-users of financial statements. 

Does voluntary adoption of XBRL reduce cost of equity capital?

2014 ◽  
Vol 22 (2) ◽  
pp. 86-102 ◽  
Author(s):  
Lizhong Hao ◽  
Joseph H. Zhang ◽  
Jing (Bob) Fang
Keyword(s):  
Financial Reporting ◽  
Lower Cost ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Economic Consequences ◽  
Fiscal Year ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Voluntary Adoption

Purpose – The paper aims to examine whether or not firms voluntarily filing in XBRL (eXtensible Business Reporting Language) format enjoy a lower cost of capital. XBRL, or “interactive data” as the US Securities and Exchange Commission refers to it, is an information format that enables electronic exchange of standardized business and financial information. Design/methodology/approach – The authors investigate whether voluntary adoption of XBRL impacts cost of equity capital using a sample of US firms participated in the SEC Voluntary Filer Program, each matched with a pair of non-XBRL filers (matched by two-digit SIC code, same fiscal yearend, and close total assets in the same year). The authors measure firm-specific cost of equity capital at the fiscal year of last voluntary XBRL filing, using the PEG ratio model proposed by Easton, Gode and Mohanram, and Hou et al. Findings – The results show that cost of equity capital is significantly and negatively associated with XBRL adoption. The magnitude of the coefficient on XBRL suggests that firms voluntarily adopting XBRL are associated with an average reduction in cost of equity capital by 17-20 basis points (conditional on different cost of capital measures). Research limitations/implications – There is a research limitation due to the sample of voluntary XBRL adopters as of self-selection bias. The authors address this issue by using the Heckman two-stage regression procedure. Practical implications – The study provides evidence on the economic consequence of XBRL adoption in that it benefits shareholders by reducing the cost of equity capital. The evidence should provide regulators like the SEC more incentives to mandate the XBRL standard and motivate companies to adopt the standard as well. Originality/value – By showing that voluntary XBRL adopters are associated with lower cost of equity capital, the study provides timely and relevant empirical evidence to the economic consequences of voluntary adoption of XBRL. It also contributes to the limited empirical research on the economic consequences of new information technology and highlights the importance of institutional regulation in shaping the outcomes of new financial reporting format.

Employee Stock Ownership and the Cost of Equity in Japanese Electronics Firms

1990 ◽  
Vol 11 (3) ◽  
pp. 353-372 ◽  
Author(s):  
Jay B. Barney
Keyword(s):  
Capital Market ◽  
Lower Cost ◽  
Conflicts Of Interest ◽  
Equity Capital ◽  
Stock Ownership ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Employee Stock Ownership ◽  
The Cost ◽  
Empirical Implications

Conflicts of interest between a firm's outside stockholders and employees will, in an efficient capital market, be reflected in a firm's cost of equity. Employee stock ownership reduces these conflicts by making the wealth of both outside stock holders and employees depend, to some extent, on the market value of a firm's stock. These reduced conflicts will, in an efficient capital market, be reflected in a lower cost of equity capital. Empirical implications of this argument are tested using a sample of Japanese electronics firms.

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