Cost of Capital and Earnings Transparency
58 Pages Posted: 25 Feb 2009 Last revised: 14 May 2013
Date Written: January 2013
We provide evidence that firms with more transparent earnings enjoy a lower cost of capital. We base our earnings transparency measure on the extent to which earnings and change in earnings covary contemporaneously with returns. We find a significant negative relation between our transparency measure and subsequent excess and portfolio mean returns, and expected cost of capital, even after controlling for previously documented determinants of cost of capital.
Keywords: accounting procedures, asset pricing, cost of capital, financial statements, risk
JEL Classification: M43, M41
Suggested Citation: Suggested Citation