Types of Investor Uncertainty and the Cost of Equity Capital

25 Pages Posted: 5 Nov 2017

See all articles by Chad R. Larson

Chad R. Larson

University of Houston - Department of Accountancy & Taxation

Robert J. Resutek

University of Georgia - J.M. Tull School of Accounting

Date Written: October/November 2017

Abstract

We jointly test the effects of two types of investor uncertainty, one related to future firm performance and unrelated to accruals (cash flow uncertainty) and one directly related to accrual estimation errors (accounting quality uncertainty). Distinct from prior studies, our uncertainty estimates are based on a matched‐firm design that minimizes the mechanical relationship between the two uncertainty variables. We find a strong negative relationship between cash flow uncertainty and multiple estimates of the cost of equity capital. With respect to accounting quality uncertainty, we find a strong positive association with both expected stock returns and implied costs of equity, but only in settings that control for cash flow uncertainty. Collectively, our results suggest the need to consider different types of investor uncertainty when examining how investor uncertainty affects the cost of equity capital.

Keywords: cost of equity capital, earnings management, earnings quality, earnings uncertainty, information uncertainty

Suggested Citation

Larson, Chad Russell and Resutek, Robert J., Types of Investor Uncertainty and the Cost of Equity Capital (October/November 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 9-10, pp. 1169-1193, 2017. Available at SSRN: https://ssrn.com/abstract=3064368 or http://dx.doi.org/10.1111/jbfa.12283

Chad Russell Larson (Contact Author)

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Robert J. Resutek

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
704
PlumX Metrics