The Empirical Test of Comparing the Cost of Equity Capital Efficiency under Information Ambiguity and Value Relevance of Earning

Document Type : Research Paper

Authors

1 PhD Candidate, Department of Accounting, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

2 Associate Prof., Department of Accounting, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

3 Assistant Prof., Department of Accounting, Rasht Branch, Islamic Azad University, Rasht, Iran.

Abstract

Objective: The cost of common stock is called the minimum expected rate of return of investors. The cost of common stock is one of the most important means in many financial and management decisions, that are influenced by several factors like liquidity, financial leverage, operating cash flow, company size and profitability. Information ambiguity increases the investment risk and make the cost of equity capital increased. Growth of value relevance of earning decreases the investment risk and consequently make the cost of common stock decreased. Therefore, the purpose of this study is to present an empirical test to compare the efficiency of two cost of capital models as Gordon and Olson Junter under the influence of information ambiguity and value relevance of earning.
Methods: For this purpose, this study was conducted with 104 sample companies during 7 years from 2012 to 2018, using descriptive analysis with Kruskal Wallis test.
Results: To this end, this study was concluded that two models of Olson Junter and Gordn have accepted reliability index and validity at different level. There is significant difference between two models.
Conclusion: The results showed that Olson Junter's model performs more efficient than Gordon's model at high- low risk levels. Consequently, cost of common stock of the former model would be useful in decision making through portfolio hedging og potential losses.

Keywords

References

Aflatoni A. (2016). Use of private information in stock trading and its impact on the cost of equity. Financial Accounting Knowledge, 3(2), 131-148. (in Persian)
Baharmoghaddam, M., Jokar, H. (2018). Investigating the Effect of Quality Accounting Information and Information Uncertainty on the Investor Sentiment. Accounting and Auditing Review, 25(1), 21-50. (in Persian)
Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6(2), 159-178.
Bani Mahd, B., Rahmannejad, Q. (2017). The value content of dividends in companies. Financial Accounting and Auditing Research, 9(33), 17-28. (in Persian)
Bayat, M., Zalaghi, H., Mirhosseini, I. (2015). A Survey of the Influence of Earning Sustainability on Value Relevance of Accounting Information. Accounting and Auditing Review, 22(1), 41-58. (in Persian)
Bayat, SH., Shabani, K., Baghoumian, R. (2013). Value relevance of accounting earnings associated with normal and abnormal returns. Journal of Empirical Research In Accounting, 3(2), 1-15. (in Persian)
Chiao, C.H., Lin, C.F., & Lai, Y.W. (2015). Transparency, Firm Characteristics and Cost of Equity. Journal of Accounting and Finance, 15(6), 46-56.
Collins, D., Kothari, S., & Rayburn, J. (1989). An analysis of intertemporal and cross-sectional determination of earning response coefficient. Journal of Accounting and Economics, 11, 143-181.
Damodaran, A. (2002). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Second Edition, Publisher: Wiley; 2nd edition.
Easton, P. (2004). PE ratios, PEG ratios and estimating the implied expected rate of return on equity capital. The accounting review, 79(1), 73-95.
Easton, P., Harris, R., & Ohlson, J. (1992). Aggregate accounting earnings can explain most of security returns: the case of long return intervals. Journal of Accounting and Economics, 15, 119-142.
Epstein, L.G., Schneider, M. (2008). Ambiguity, information quality and asset pricing. The Journal of Finance, 63(1), 197–228.
Hua, J. (2011). The impact of information uncertainty on stock price performance and managers equity finance decision. Durham Business School, University of Durham.
Jiang, G., Lee, M.C.C., Zhang, Y. (2005). Information uncertainty and expected returns. Review of Accounting Studies, 10, 185–221.
Khajavi, Sh., Faal Ghaumi, A. (2016). Investigating the Relationship between Accounting Ratios and Skewness of Stock Return to Explain the Growth and Value Stocks Anomaly. Accounting and Auditing Review, 23(4), 461-482. (in Persian)
Khodapaneh, M., Darzi, A., & Noroush, F. (2019). Asymmetric Information, Cost of Capital and Fair Disclosure. Accounting and Auditing Review, 11(42), 159-176. (in Persian)
Naimah, Z. (2012). Bias in Accounting and the Value Relevance of Accounting Information. 2nd Annual International Conference on Accounting and Finance (AF 2012). Procedia Economics and Finance, 2, 145 – 156.
Ohlson, J.A., & Juettner-Nauroth, B.E. (2005). Expected EPS and EPS growth as determinants of value. Review of Accounting Studies, 10, 349-365.
Osoolian, M., Sadeghi Sharif, S.J., Khalili, M.A. (2017). Accruals, Cash Flow, and Operating Profitability in the Cross Section of Stock Returns; Evidence from Tehran Stock Exchange (TSE). Accounting and Auditing Review, 24(4), 463-482. (in Persian)
Peng He, W., Lepone, A., & Leung, H. (2013). Information asymmetry and the cost of equity capital. International Review of Economics & Finance, 27, 611-620.
Rahnamay Roodposhti, F., Nikoomaram, H., & Jahanmiri, M.H. (2019). Informational uncertainty a criterion to explain stock returns (Behavioral Approach). Investment knowledge, 7(26), 131- 148. (in Persian)
Saini, J.S., & Herrmann, D. (2010). Cost of Equity Capital, Information Asymmetry, and Segment Disclosure. Available at: http://dx.doi.org/10.2139/ssrn.1758934.
Salonen, R. (2016). Financing Decisions and Firm-level Cost of Capital. Department of Finance Aalto University School of Business.
Tucker, J.W., & Zarowin, P.A. (2006). Does income smoothing improve earing informativeness? The accounting review, 81, 251-270.
Viviania, J.L., Laia, A.N., Louhichib, W. (2017). The impact of asymmetric ambiguity on investment and financing decisions. Economic Modelling. http://dx.doi.org/10.1016/j. econmod. 2017.09.020.
Yahya Zadehfar M., & Khorramdin, J. (2009). The Role of Liquidity Factors and Illiquidity Risk on Excess Stock Return in Tehran Stock Exchange. Accounting and Auditing Review, 15(4), 101-118. (in Persian)
Zakizadeh, M.A., Rezaei, F., Noravesh, I. (2019). Assessment and Developing Model to Audit Risk Based Corporate Fundamental Characteristics. Journal of Financial Accounting and Auditing Research, 11(43), 119- 152. (in Persian)
Zhang, X. (2006). Information uncertainty and stock returns. Journal of Finance, 61 (1), 105-136.
Accounting and Auditing Review
Volume 26, Issue 4
2019
Pages 499-516

Files

Share

How to cite

Statistics