Cost of Capital and Earnings Transparency

Article Review

Cost of Capital and Earnings Transparency

Author: Mary E.beth ,Yaniv Konchitki ,Wayne R.landsman

Digital Object Identifier: http://dx.doi.org/10.1016/j.jacceco.2013.01.004

Print ISBN:

Pages: 206-224

Date: April-May 2013,

Article Review by: Mohammad Aezat abd Halim

Summary of the article:

The purpose of the study was to examine the relationship between cost of capital and earnings transparency. The author discusses that firm with more transparent earning enjoys a lower cost of capital and those whose better earning reflect changes in the economic value of the firm. Previous research in this area and that the relationship is not well established and has been difficult to quantify. The author measure based on the earnings transparency on the explanatory power of the returns-earnings relation and change in earnings.

The result shows that earnings transparency is significantly negatively associated with cost of capital by showing that earnings transparency measure is negatively related to subsequent excess return and differences in portfolio mean subsequent returns incremental to the three Fama – French and momentum factors.

Introduction:

Transparent earning in accounting is the extent to which investors have ready access to any required financial information about a company such as price levels, market depth and audited financial reports. Classically defined as when "much is known by many", transparency is one of the silent prerequisites of any free and efficient market.

When transparency relates to information flow from the company to investors, it is also known as "full disclosure".

There is no doubt any companies that have high voluntary disclosure can prevent the deceit behavior such as fraud. Voluntary disclosure has become an effective way to demonstrate the competitiveness, communicate with related organizations and persons and describe the future of company. A higher level of voluntary disclosure reduces information...