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


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