Cost of capital and earnings transparency

Highlights • Our study is the first to establish a significant negative relation between earnings transparency and cost of capital. • Our transparency measure is based on the extent to which earnings and change in earnings covary with stock returns. • Our transparency measure permits cross-sectional and intertemporal variation in the returns-earnings relation. • Firms with more transparent earnings have lower cost of capital as reflected in subsequent excess and portfolio mean returns • More transparent earnings also are significantly negatively associated with expected cost of capital. Abstract We provide evidence that firms with more transparent earnings enjoy a lower cost of capital. We base our earnings transparency measure on the extent to which earnings and change in earnings covary contemporaneously with returns. We find a significant negative relation between our transparency measure and subsequent excess and portfolio mean returns, and expected cost of capital, even after controlling for previously documented determinants of cost of capital.

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Journal of Accounting & Economics

The Journal of Accounting and Economics is a peer-reviewed academic journal focusing on the fields of accounting and economics.

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