Publication Type

Journal Article

Publication Date

1-2012

Abstract

Using path analysis, we investigate the direct and indirect links between three measures of earnings quality and the cost of equity. Our investigation is motivated by analytical models that specify both a direct link and an indirect link that is mediated by information asymmetry, but do not suggest which link would be more important empirically. We measure information asymmetry as both the adverse selection component of the bid-ask spread and the probability of informed trading (PIN). For a large sample of Value Line firms during 1993–2005, we find statistically reliable evidence of both a direct path from earnings quality to the cost of equity, and an indirect path that is mediated by information asymmetry, with the weight of the evidence favoring the direct path as the more important.

Keywords

path analysis, earnings quality, information asymmetry

Discipline

Accounting | Corporate Finance

Research Areas

Financial Intermediation and Information

Publication

Accounting Review

Volume

87

Issue

2

First Page

449

Last Page

482

ISSN

0001-4826

Identifier

10.2308/accr-10200

Publisher

American Accounting Association

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Share

COinS