Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy

54 Pages Posted: 30 Jul 2015 Last revised: 6 Nov 2015

See all articles by Yaniv Konchitchki

Yaniv Konchitchki

University of California, Berkeley - Haas School of Business

Yan Luo

Fudan University

Mary L. Z. Ma

York University

Feng Wu


Date Written: August 6, 2015


We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we find that, relative to low earnings downside risk firms, high earnings downside risk firms experience more negative operating performance over the subsequent period, are more sensitive to downward macroeconomic states, and are more strongly linked to earnings attributes and other risk-related measures from prior research. In line with our prediction, we also find that earnings downside risk explains variation in firms’ cost of capital, and that this link between earnings downside risk and cost of capital is incremental to several earnings attributes, accounting and risk factor betas, return downside risk, default risk, earnings volatility, and firm fundamentals. Overall, this study contributes to accounting research by demonstrating the key valuation and risk assessment roles of earnings downside risk derived from firms’ financial statements, also shedding new light on the link between accounting and the macroeconomy.

Keywords: Accounting performance; earnings downside risk; cost of capital; financial statement analysis; macroeconomy

JEL Classification: M41; G12; G14

Suggested Citation

Konchitchki, Yaniv and Luo, Yan and Ma, Mary L. Z. and Wu, Feng, Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy (August 6, 2015). Review of Accounting Studies, Forthcoming. Available at SSRN: or

Yaniv Konchitchki (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Yan Luo

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433

Mary L. Z. Ma

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3

Feng Wu

Independent ( email )

No Address Available

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