Accounting Information, the Cost of Capital and Excess Stock Returns: The Role of Earnings Quality-Evidence from Panel Data

Abstract

This paper investigates the impact of the firm's accounting information and, especially the role of earnings quality, on its cost of capital and how this influences excess returns. The analysis extends prior works by investigating how components of accounting information and, especially earnings quality, affect stock returns through their effect on the cost of capital. The empirical approach uses a sample of US manufacturing firms as well as the methodology of panel data. The empirical findings display that all components of accounting information affect the firm's cost of capital, which, in turn, exerts a negative effect on the firm's excess returns, an empirical documentation not captured in case that the analysis links directly the cost of capital and excess returns. [PUBLICATION ABSTRACT]