Cost of Equity and Earnings Transparency

Abstract

Purpose- The purpose of this research is to examine the relation between earnings transparency and cost of equity. Also the relation between earnings transparency and abnormal return is examined. Design/methodology/approach- Financial data of 121 listed companies quoted in Tehran Stock Exchange is examined for the period of 1384-1388. To measure the earnings transparency, the contemporaneous changes of earnings and returns are used. Cost of equity is calculated based on Fama-French three-factor model. To calculate the dependent and independent variables and to test the hypotheses, the multi-variation regression model is used. Findings- The findings show that there is a negative and significant relation between earnings transparency and cost of equity. That is, firms that have more transparent earnings, experience lower cost of equity. Also there is a negative and significant relation between earnings transparency and abnormal return. Firms that have more transparent earnings, experience lower abnormal return. Originality/value- Emphasizing the importance of financial information transparency (especially earnings) as an important qualitative characteristic in financial reporting and introducing a model for calculating it.

Keywords

• Cost of Equity
• Earnings Transparency
• Abnormal return
• Fama
• French Three
• Actor Model