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

22 Pages Posted: 27 Apr 2009

See all articles by Philip Gray

Philip Gray

Department of Banking and Finance, Monash University

Ping-Sheng Koh

ESSEC Business School

Yen H. Tong

affiliation not provided to SSRN

Date Written: 2008-10

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.

Suggested Citation

Gray, Philip and Koh, Ping-Sheng and Tong, Yen H, Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia (2008-10). Journal of Business Finance & Accounting, Vol. 36, Issue 1-2, pp. 51-72, January/March 2009, Available at SSRN: https://ssrn.com/abstract=1378261 or http://dx.doi.org/10.1111/j.1468-5957.2008.02118.x

Philip Gray

Department of Banking and Finance, Monash University ( email )

Building H
Caulfield, Victoria 3141
Australia

Ping-Sheng Koh

ESSEC Business School ( email )

5 Nepal Park
139408
Singapore
+65 6413 9737 (Phone)

Yen H Tong

affiliation not provided to SSRN

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