The relation between accounting information-based firm risk proxies and cost of equity capital across countries

Abstract

Purpose - The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001). Design/methodology/approach - Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements. Findings - The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball's notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure. Originality/value - Findings support Ball's notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.