Property Crime, Earnings Variability, and the Cost of Capital
University of Arizona
Dan S. Dhaliwal
University of Arizona - Department of Accounting
Douglas J. Fairhurst
Washington State University
Matthew A. Serfling
University of Arizona - Department of Finance
March 18, 2015
We examine whether firms located in areas where crime is more prevalent have more uncertain earnings and higher financing costs. We document that firms headquartered in states with higher property crime rates have more volatile and less persistent earnings, and for these firms, analysts’ earnings forecasts are less accurate, more dispersed among analysts, and display greater revision volatility. Firms headquartered in states with higher property crime rates also have a higher cost of equity and debt capital. This relation is robust to accounting for econometric concerns. Further, when firms relocate their headquarters, we find a positive relation between changes in property crime rates and changes in their cost of equity. Overall, our paper shows that the risk of theft-related losses can have an important effect on firms’ earnings variability and cost of capital and that a potentially large and overlooked cost of crime is higher financing costs.
Number of Pages in PDF File: 59
Keywords: Earnings variability, Cost of equity, Cost of debt, Property crime, Theft
JEL Classification: G12, G30, M41
Date posted: December 22, 2013 ; Last revised: March 20, 2015
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