Earnings Quality, Insider Trading, and Cost of Capital

23 Pages Posted: 8 May 2006

See all articles by David Aboody

David Aboody

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2005-04-26

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 firms` 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 firms. 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.

Suggested Citation

Aboody, David, Earnings Quality, Insider Trading, and Cost of Capital (2005-04-26). Journal of Accounting Research, Vol. 43, pp. 651-673, December 2005. Available at SSRN: https://ssrn.com/abstract=876684 or http://dx.doi.org/10.1111/j.1475-679X.2005.00185.x

David Aboody (Contact Author)

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

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
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