Investigate the Relationship between Earnings Qualityand the Cost of Equity

Based on the usefulness of the decision, earnings quality is the favorite of those who usefinancial reports to make decisions on investment. In this regard, the cost of equity is animportant aspect that has been emphasized in recent studies. The current study aims atexamining the direct and indirect (with the presence of information asymmetry mediator)effects of earnings quality on the cost of equity. This study has got an applied goal andconsidering its methodology is of those benefiting correlation. The population of currentstudy consists of the companies listed at Tehran Stock Exchange during the years 2007-2011 such that 119 companies have been selected as our sample. In this study earnings quality is measured by accruals quality which its measurement, AQ, is based on Dechow and Dichev’s modified model (2002), information asymmetry measured by relative gap in proposed purchase/sale prices and the cost of equity measured by net income over market value of equity. Multi-variate regression method based on panel data was used to test the hypotheses. Results indicate a negative and significant effect of earnings quality on the cost of equity. But earnings quality has no significant effect on information asymmetry. On the other hand, information asymmetry has no significant effect on the cost of equity. Finally, the role of information asymmetry as a mediator variable was not confirmed in the relationship between earnings quality and the cost of equity.

Investigate the Relationship between Earnings Qualityand the Cost of Equity Keywords:

earnings quality , information asymmetry , the cost of equity