Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia

Abstract

Recent theoretical work argues that information risk is a non-diversifiable risk factor that is priced in the capital market. Using accruals quality to proxy for information risk, Francis et al. (2005) provide empirical support for this argument using a sample of US firms. This paper re-examines the interplay of accruals quality, information risk and cost of capital in Australia, where a number of important institutional and regulatory differences are hypothesized to affect the relation between accruals quality and cost of capital. The results suggest that, while accruals quality impacts on the cost of capital for Australian firms, some salient differences exist. In contrast to findings for US firms, the costs of debt and equity for Australian firms are largely influenced by accruals quality arising from economic fundamentals (i.e., innate accrual quality) but not discretionary reporting choices (i.e., discretionary accrual quality). This finding is consistent with our predictions based on the Australian institutional and regulatory environment. In addition, using both the asset pricing tests in Francis et al. (2005) and Core et al. (2008), we provide evidence consistent with accruals quality being a priced risk factor.

Pengaruh Kualitas Akrual Dan Leverage Terhadap Cash Holding Perusahaan

“…Perusahaan dengan kualitas akuntansi yang tinggi tidak perlu menahan kas dalam jumlah yang besar untuk membiayai proyeknya karena perusahaan akan lebih mudah untuk menerbitkan hutang dengan biaya yang rendah (mengurangi asimetri informasi antara perusahaan dan kreditur). Gray et al (2008) menyebutkan bahwa beberapa penelitian telah mencoba menghubungkan kualitas laporan keuangan yang diproksikan dengan kualitas akrual dengan risiko informasi. Risiko akan informasi adalah risiko yang tidak dapat didiversifikasi.…”

“…Asimetri informasi dapat didefinisikan sebagai perbedaan informasi yang dimiliki oleh manajer sebagai pengelola perusahaan dengan pemilik perusahaan yang ada di luar perusahaan (Gray et al 2008 …”

Governance Quality and Information Alignment

“…Van Ness et al (2001) use the average volatility of daily stock returns in addition to the bid-ask spread as a proxy for information asymmetry. Wang (1993) shows that information asymmetry among investors can increase volatility, although Pardo and Torro (2007) and Gray et al (2009) caution that volatility can overstate the level of asymmetric information. Accordingly, we assume that the higher the average volatility in daily stock return (VOLATILITY), the higher the degree of asymmetric information.…”

The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure

“…Their findings are consistent with Gray et al (2009), indicating a negative relationship between innate accruals and a company's cost of debt.…”

“…Gray et al (2009) demonstrate a negative association between a company's cost of debt and its level of innate accruals quality. Innate accruals quality refers to the quality of accruals reported by a company as a result of their economic fundamentals.…”