Cross-Sectional Determinants of Information Quality Proxies and Cost of Capital Measures

46 Pages Posted: 11 Sep 2007 Last revised: 30 Jan 2008

See all articles by Michelle Liu

Michelle Liu

CUNY Hunter College

Peter D. Wysocki

Boston University Questrom School of Business

Date Written: December 20, 2007

Abstract

This paper examines the source of the documented empirical link between measures of accruals quality and a firm's cost of capital. First, we argue that when regressions include accruals quality and operating volatility as determinants, these highly correlated measures capture different underlying constructs. Second, we find that in such regressions, the accruals quality measure displays inconsistent associations, while operating volatility variables display robust associations, with various cost of capital measures. Third, we provide research design suggestions to disentangle the effect of accruals quality from operating volatility, and we show how this method leads to less noisy coefficient estimates. These findings should be useful in designing empirical tests of the hypothesized associations involving accruals quality, operating volatility, and cost of capital.

JEL Classification: M41, M43, G12

Suggested Citation

Liu, Michelle and Wysocki, Peter D., Cross-Sectional Determinants of Information Quality Proxies and Cost of Capital Measures (December 20, 2007). AAA 2008 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1013652 or http://dx.doi.org/10.2139/ssrn.1013652

Michelle Liu (Contact Author)

CUNY Hunter College ( email )

695 Park Avenue
New York, NY 10065
United States

Peter D. Wysocki

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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