Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia

Gray, Philip, Koh, Ping-Sheng and Tong, Yen H. (2009) Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia. Journal of Business, Finance and Accounting, 36 1/2: 51-72.


Author Gray, Philip
Koh, Ping-Sheng
Tong, Yen H.
Title Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia
Journal name Journal of Business, Finance and Accounting   Check publisher's open access policy
ISSN 0306-686X
Publication date 2009-01-07
Year available 2009
Sub-type Article (original research)
DOI 10.1111/j.1468-5957.2008.02118.x
Volume 36
Issue 1/2
Start page 51
End page 72
Total pages 22
Editor P. J. Pope
A. W. Stark
M. Walker
Place of publication Oxford, UK
Publisher Wiley-Blackwell Publishing
Collection year 2010
Language eng
Subject C1
150201 Finance
900101 Finance Services
Abstract Recent theoretical work argues that information risk is a non-diversifiable risk factor that is priced in the capital market. Using accruals quality to proxy for information risk, Francis et al. (2005) provide empirical support for this argument using a sample of US firms. This paper re-examines the interplay of accruals quality, information risk and cost of capital in Australia, where a number of important institutional and regulatory differences are hypothesized to affect the relation between accruals quality and cost of capital. The results suggest that, while accruals quality impacts on the cost of capital for Australian firms, some salient differences exist. In contrast to findings for US firms, the costs of debt and equity for Australian firms are largely influenced by accruals quality arising from economic fundamentals (i.e., innate accrual quality) but not discretionary reporting choices (i.e., discretionary accrual quality). This finding is consistent with our predictions based on the Australian institutional and regulatory environment. In addition, using both the asset pricing tests in Francis et al. (2005) and Core et al. (2008), we provide evidence consistent with accruals quality being a priced risk factor.
Keyword accruals quality
information risk
cost of capital
information asymmetry
information precision
discretionary
innate
Q-Index Code C1
Q-Index Status Confirmed Code

Document type: Journal Article
Sub-type: Article (original research)
Collections: 2010 Higher Education Research Data Collection
UQ Business School Publications
 
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Created: Mon, 23 Mar 2009, 18:31:00 EST by Karen Morgan on behalf of UQ Business School