Does accounting quality impact the cost of capital An empirical study on the German capital market

Abstract

In this paper we examine whether the accounting quality has an impact on the cost of capital of listed German firms from 1995 to 2014. The accounting quality is approximated by the amount of earnings management executed by the firms' management. Earnings management is operationalised by measures according to Leuz et al. (2003) and the cost of capital is estimated by the capital asset pricing model (CAPM). By using fixed-effects regressions and variance analyses on portfolios referring the research area of accounting quality and the cost of capital, we find that firms with high accounting quality and a low level of earnings management have averagely significant lower cost of capital than firms with low accounting quality and a high level of earnings management.