Options Trading and the Cost of Equity Capital

2012 ◽  
Vol 88 (1) ◽  
pp. 261-295 ◽  
Author(s):  
Vic Naiker ◽  
Farshid Navissi ◽  
Cameron Truong
Keyword(s):  
Trading Volume ◽  
Equity Capital ◽  
Data Availability ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Expected Return ◽  
Cross Sectional ◽  
Wide Range ◽  
Options Trading ◽  
Implied Cost Of Equity

ABSTRACT: This study examines how options trading affects the rate of return expected by investors, i.e., the implied cost of equity capital. Our cross-sectional analysis suggests that firms with listed options have lower implied cost of equity capital than firms without listed options, while the results from our temporal difference-in-differences analysis suggest that firms with listed options experience a significant decrease in their implied cost of equity capital relative to a matched sample of firms without listed options following an options listing. Moreover, we find that within firms that have listed options, firms with higher options trading volume are associated with lower implied cost of equity capital. These findings, which are robust to a wide range of additional tests, are consistent with the view that options trading improves the precision of information and reduces information asymmetry problems, resulting in lower expected return on equity. Data Availability: All data used in this study are publicly available from the sources identified in the paper.

Auditor-Provided Tax Nonaudit Services and the Implied Cost of Equity Capital

2017 ◽  
Vol 37 (3) ◽  
pp. 1-24 ◽  
Author(s):  
Nasser Alsadoun ◽  
Vic Naiker ◽  
Farshid Navissi ◽  
Divesh S. Sharma
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Equity Capital ◽  
Data Availability ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Sarbanes Oxley ◽  
Sensitivity Tests ◽  
Nonaudit Services ◽  
Implied Cost Of Equity

SUMMARY Although the Sarbanes-Oxley Act of 2002 (SOX) banned most nonaudit services (NAS), it did not restrict auditors from providing tax NAS to their audit clients. In the post-SOX period, regulators and investors are highly concerned about the increase in tax NAS and consequently calling for restrictions. The profession contends that tax NAS are beneficial to the audit and opposes limitations. We contribute to this ongoing debate and fill a void in the literature by examining investors' perception of auditor-provided tax NAS, as reflected in the implied cost of equity capital. Our results suggest that investors require higher cost of equity capital for clients that generate more tax NAS revenue for their auditor's office. Further tests reveal that our main finding is driven by audit clients that report more uncertain tax reserves (higher tax risk), rather than clients that exhibit poor financial reporting quality. The effects we document are economically significant and robust to a large battery of sensitivity tests. Our findings suggest that investors seem to negatively perceive tax NAS because of punitive and cash flow risks associated with tax NAS. Data Availability: All data are publicly available from sources identified in the text.

scholarly journals Information Asymmetry, Ownership Structure and Cost of Equity Capital: The Formation for Open Innovation

2021 ◽  
Vol 7 (1) ◽  
pp. 48
Author(s):  
Ade Imam Muslim ◽  
Doddy Setiawan
Keyword(s):  
Stock Market ◽  
Information Asymmetry ◽  
Ownership Structure ◽  
Trading Volume ◽  
Foreign Ownership ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Ownership Structures ◽  
The Cost

Our study aims to investigate how information asymmetry and ownership structure affect cost of equity capital. For that purpose, we collected 246 issuers over 4 years for a total of 984 observations. By using panel data processing, we found that the information asymmetry we proxied through Price non-Synchronization and trading volume had an effect on the cost of equity capital. Our results also confirmed both Agency Theory and Pecking Order Theory. Both theories are in line with the conditions of the stock market in Indonesia. In addition, we found that institutional and foreign ownership structures also had an effect on the cost of equity capital. Furthermore, our results also confirmed Interest Alignment Theory and Entrenchment Theory. Our research is expected to contribute to the debate on the existence of information asymmetry and ownership structures in relation to the cost of equity capital. We also hope that it will be a valuable input for investors in considering their investment. Moreover, from the results of this study, investors can also consider foreign ownership or institutional ownership in determining their investment. In addition, stock market regulators in Indonesia can develop approaches to minimize information asymmetry and encourage foreign investors to invest in Indonesia.

Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research

2010 ◽  
Vol 85 (2) ◽  
pp. 483-512 ◽  
Author(s):  
Ian D. Gow ◽  
Gaizka Ormazabal ◽  
Daniel J. Taylor
Keyword(s):  
Time Series ◽  
Equity Capital ◽  
Cost Of Debt ◽  
Test Statistics ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Cross Sectional ◽  
Accounting Research ◽  
The Cost ◽  
Series Dependence

ABSTRACT: We review and evaluate the methods commonly used in the accounting literature to correct for cross-sectional and time-series dependence. While much of the accounting literature studies settings in which variables are cross-sectionally and serially correlated, we find that the extant methods are not robust to both forms of dependence. Contrary to claims in the literature, we find that the Z2 statistic and Newey-West corrected Fama-MacBeth standard errors do not correct for both cross-sectional and time-series dependence. We show that extant methods produce misspecified test statistics in common accounting research settings, and that correcting for both forms of dependence substantially alters inferences reported in the literature. Specifically, several findings in the implied cost of equity capital literature, the cost of debt literature, and the conservatism literature appear not to be robust to the use of well-specified test statistics.

scholarly journals The Impact of Controlling for Risk on the Value Relevance of Earnings: Evidence from the U.S.

2017 ◽  
Vol 12 (9) ◽  
pp. 38
Author(s):  
Xiaoli Ortega
Keyword(s):  
Firm Size ◽  
Value Relevance ◽  
Explanatory Power ◽  
Equity Capital ◽  
Price Ratio ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Cross Sectional ◽  
Market Beta ◽  
The Impact

Prior research documents the relatively low explanatory power of the earnings-return association in traditional models that regress returns on levels and changes in earnings. However, these studies fail to consider the impact of variation in discount rates, or risk, as a possible cause of the low explanatory power. In this study, I investigate the impact of controlling for risk on the explanatory power of the earnings-return relation. I begin by estimating two related regression models of annual returns on earnings and changes in earnings drawn from prior research. Then, to examine whether controlling for risk affects the explanatory power of the regressions, I sort observations into portfolios formed on various risk proxies, including market beta, firm size, earnings/price ratio, two implied cost of equity capital proxies, and the combination of beta and firm size. I document higher average adjusted R2s that suggest a 30% increase in explanatory power, and larger average coefficient estimates of earnings, when I estimate the return-earnings regressions within risk portfolios than those of the Easton and Harris and Easton and Pae models. These findings suggest that controlling for cross-sectional variation in risk, a denominator effect, improves the explanatory power of the model.

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>

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