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The relation between accounting information-based firm risk proxies and cost of equity capital across countries

The relation between accounting information-based firm risk proxies and cost of equity capital... Purpose – The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001). Design/methodology/approach – Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements. Findings – The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure. Originality/value – Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

The relation between accounting information-based firm risk proxies and cost of equity capital across countries

Pacific Accounting Review , Volume 27 (1): 26 – Feb 2, 2015

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References (81)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0114-0582
DOI
10.1108/PAR-03-2013-0019
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001). Design/methodology/approach – Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements. Findings – The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure. Originality/value – Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Feb 2, 2015

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