Earnings Quality, Insider Trading, and Cost of Capital

36 Pages Posted: 6 Jul 2004

See all articles by David Aboody

David Aboody

University of California, Los Angeles (UCLA) - Accounting Area

John S. Hughes

University of California at Los Angeles

Jing Liu

The Cheung Kong Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 2003

Abstract

Previous research argues that earnings quality, measured as the unsigned abnormal accruals, proxies for information asymmetries that affect cost of capital. We examine this argument directly in two stages. In the first stage, we estimate the firm's exposure to an earnings quality factor in the context of a Fama-French three factor model augmented by the return on a factor-mimicking portfolio that is long in low earnings quality firms and short in high earnings quality firm. In the second stage, we examine whether the earnings quality factor is priced and whether insider trading is more profitable for firms with higher exposure to that factor. Generally speaking, we find evidence consistent with pricing of the earnings quality factor and insiders trading more profitably in firms with higher exposure to that factor.

JEL Classification: G12, G29, D82, M41, M45

Suggested Citation

Aboody, David and Hughes, John S. and Liu, Jing, Earnings Quality, Insider Trading, and Cost of Capital (October 2003). 14th Annual Conference on Financial Economics and Accounting (FEA). Available at SSRN: https://ssrn.com/abstract=488203 or http://dx.doi.org/10.2139/ssrn.488203

David Aboody

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-825-3393 (Phone)
310-267-2193 (Fax)

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Jing Liu (Contact Author)

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza
E3/3F
Beijing
China

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