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The impact of earnings quality on the association between readability and cost of capital

The impact of earnings quality on the association between readability and cost of capital The purpose of this paper is to explore the relationship between disclosure quality, measured by the readability of the board of directors’ report and cost of capital (CoC), and, second, attempt to investigate the moderating effect of earnings quality on the relationship between readability and CoC.Design/methodology/approachThe sample includes the Egyptian EGX 100 companies, listed from 2013 to 2015, and the study runs two ordinary least square models to test the two main hypotheses. The study applies the LIX formula to calculate the readability level of board of director’ reports and uses the weighted average CoC to calculate CoC. Moreover, the performance-adjusted modified Jones model is used to measure earnings quality.FindingsThe results indicate that in the Egyptian context the readability of board of director’ reports does not impact on CoC. In addition, after moderating by earnings quality, there is a significant association between readability and CoC. The interaction between earnings quality and readability has a significant impact on CoC. This finding is consistent with the notion that, conditional on earnings quality, the benefits of easy writing style in the annual reports, prepared by the company’s managers, are reflected in the reduction of CoC.Originality/valueBased on the limited literature relating to developing countries’ capital markets, this study contributes to the accounting literature by providing empirical evidence on the conditional effect of earnings quality and of the consequences of linguistics style in the emerging market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

The impact of earnings quality on the association between readability and cost of capital

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2042-1168
DOI
10.1108/jaee-12-2018-0136
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to explore the relationship between disclosure quality, measured by the readability of the board of directors’ report and cost of capital (CoC), and, second, attempt to investigate the moderating effect of earnings quality on the relationship between readability and CoC.Design/methodology/approachThe sample includes the Egyptian EGX 100 companies, listed from 2013 to 2015, and the study runs two ordinary least square models to test the two main hypotheses. The study applies the LIX formula to calculate the readability level of board of director’ reports and uses the weighted average CoC to calculate CoC. Moreover, the performance-adjusted modified Jones model is used to measure earnings quality.FindingsThe results indicate that in the Egyptian context the readability of board of director’ reports does not impact on CoC. In addition, after moderating by earnings quality, there is a significant association between readability and CoC. The interaction between earnings quality and readability has a significant impact on CoC. This finding is consistent with the notion that, conditional on earnings quality, the benefits of easy writing style in the annual reports, prepared by the company’s managers, are reflected in the reduction of CoC.Originality/valueBased on the limited literature relating to developing countries’ capital markets, this study contributes to the accounting literature by providing empirical evidence on the conditional effect of earnings quality and of the consequences of linguistics style in the emerging market.

Journal

Journal of Accounting in Emerging EconomiesEmerald Publishing

Published: Aug 2, 2019

Keywords: Egypt; Readability; LIX formula; Earnings quality (EQ); Cost of capital (CoC)

References