The Influence of Discretionary Accruals and Corporate Governance on Cost of Equity Capital : Using Unbalanced Panel Data with Fixed Effects Regression Model
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Published:
Jun 24, 2020
Keywords:
Discretionary Accruals, Corporate Governance, Cost of Equity Capital
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Abstract
The main objective of this study is to analyze the influence of discretionary accruals and corporate governance on the cost of equity capital in Thai listed companies. Two groups of independent variable are comprised in this study: 1. discretionary accruals estimated from Performance matched discretionary accruals model and 2. corporate governance mechanisms included: board independence, board size, CEO-chair duality, audit committee financial expertise, audit opinion, managerial ownership and institutional shareholders. The dependent variable in this study is the cost of equity capital estimated from the capital assets pricing model (CAPM). Using unbalanced panel data with fixed effects model, this study reveals that companies with greater discretionary accruals and higher proportion of managerial ownership are likely to have higher cost of equity capital. In contrast, the companies with greater board independence, board size, audit committee financial expertise, and institutional shareholders are likely to experience lower cost of equity capital.
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Research Articles
บทความที่ปรากฏในวารสารนี้ เป็นความรับผิดชอบของผู้เขียน ซึ่งสมาคมนักวิจัยไม่จำเป็นต้องเห็นด้วยเสมอไป การนำเสนอผลงานวิจัยและบทความในวารสารนี้ไปเผยแพร่สามารถกระทำได้ โดยระบุแหล่งอ้างอิงจาก "วารสารสมาคมนักวิจัย"
References
พิริยะกุล, ม. (2013). Panel data analysis. วารสารรามคำแหง สาขาวิทยาศาสตร์และเทคโนโลยี, 30(2), 41-54.
References
Abed, S., Al-Attar, A., & Suwaidan, M. (2012). Corporate Governance and Earnings Management: Jordanian Evidence. International Business Research, 5(1), 216-225. Ahmad, A., Saleh, N. M., Iskandar, T. M., & Alias, M. A. (2011). The monitoring role of institutional investors and earning opacity. Peranan pengawasan pelabur institusi dan kekaburan perolehan, 32, 83-101. Ali Shah, S. Z., Butt, S. A., & Hasan, A. (2009). Corporate Governance and Earnings Management an Empirical Evidence Form Pakistani Listed Companies. European Journal of Scientific Research, 26(2), 624-638. Ashton, D. (1995). The cost of equity capital and a generalisation of the dividend growth model. Accounting and business research, 26(1), 3-17. Banko, J., Frye, M. B., Wang, W., & Whyte, A. M. (2013). Earnings management and annual general meetings: The role of managerial entrenchment. Financial Review, 48(2), 259-282. Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3-18. Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. The Journal of Finance, 32(3), 663-682. Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24. Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing, 23(2), 13-35. Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The Journal of Finance, 43(2), 507-528. Bhattacharya, N., Desai, H., & Venkataraman, K. (2013). Does earnings quality affect information asymmetry? Evidence from trading costs. Contemporary Accounting Research, 30(2), 482-516. Bhattacharya, U., Daouk, H., & Welker, M. (2003). The world price of earnings opacity. The accounting review, 78(3), 641-678. Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2), 112-131. Black, F. (1972). Capital market equilibrium with restricted borrowing. The Journal of Business, 45(3), 444-455. Botosan, C., Plumlee, M., & Xie, Y. (2004). The role of information precision in determining the cost of equity capital. Review of Accounting Studies, 9(2-3), 233-259.
Brennan, N., & Solomon, J. (2008). Corporate governance, accountability and mechanisms of accountability: an overview. Accounting, Auditing & Accountability Journal, 21(7), 885-906. Chen, H., Chen, J. Z., Lobo, G., & Wang, Y. (2011). Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China. Contemporary Accounting Research, 28(3), 892-925. Cheng, C. A., Collins, D., & Huang, H. H. (2006). Shareholder rights, financial disclosure and the cost of equity capital. Review of Quantitative Finance and Accounting, 27(2), 175-204. Cornett, M. M., Marcus, A. J., & Tehranian, H. (2008). Corporate governance and pay-for-performance: The impact of earnings management. Journal of Financial Economics, 87(2), 357-373. Da, Z., Guo, R.-J., & Jagannathan, R. (2012). CAPM for estimating the cost of equity capital: Interpreting the empirical evidence. Journal of Financial Economics, 103(1), 204-220. Dao, M., Huang, H. W., & Zhu, J. (2012). The effects of audit committee members' age and additional directorships on the cost of equity capital in the usa. European Accounting Review. Davidson, R., Goodwin-Stewart, J., & Kent, P. (2005). Internal governance structures and earnings management. Accounting and Finance, 45(2), 241-267. Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, Y. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The accounting review, 86(1), 59-100. Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The accounting review, 86(1), 59-100. Eaton, T. V., Nofsinger, J. R., & Weaver, D. G. (2007). Disclosure and the cost of equity in international cross-listing. Review of Quantitative Finance and Accounting, 29(1), 1-24. Ebrahim, A. (2007). Earnings management and board activity: an additional evidence. Review of Accounting and Finance, 6(1), 42-58. El Ghoul, S., Guedhami, O., Kwok, C. C. Y., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance, 35(9), 2388-2406. Epps, R. W., & Guthrie, C. P. (2010). Sarbanes-Oxley 404 material weaknesses and discretionary accruals. Accounting Forum, 34, 67-75. Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2), 187-243. Gray, P., Koh, P. S., & Tong, Y. H. (2009). Accruals quality, information risk and cost of capital: Evidence from Australia. Journal of Business Finance and Accounting, 36(1-2), 51-72. Harris, R. S., Marston, F. C., Mishra, D. R., & O'Brien, T. J. (2003). Ex ante cost of equity estimates of S&P 500 firms: The choice between global and domestic CAPM. Financial Management, 51-66. Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and its implications for Standard Setting. American Accounting Association Accounting Horizons, 13(4), 365-383. Hribar, P., & Collins, D. W. (2002). Errors in Estimating Accruals: Implications for Empirical Research. Journal of Accounting Research, 40(1), 105-134. doi: 10.1111/1475-679x.00041
Hribar, P., & Jenkins, N. T. (2004). The effect of accounting restatements on earnings revisions and the estimated cost of capital. Review of Accounting Studies, 9(2-3), 337-356. Huang, H., Wang, Q., & Zhang, X. (2009). The effect of CEO ownership and shareholder rights on cost of equity capital. Corporate Governance, 9(3), 255-270. Jagannathan, R., & Meier, I. (2002). Do we need CAPM for capital budgeting? : National Bureau of Economic Research. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. Johl, S., Jubb, C. A., & Houghton, K. A. (2007). Earnings management and the audit opinion: evidence from Malaysia. Managerial Auditing Journal, 22(7), 688-715. Jonas, G., & Blanchet, J. (2000). Assessing quality of financial reporting. Accounting Horizons, 14(3), 353363. Kao, J. L., Wu, D., & Yang, Z. (2009). Regulations, earnings management, and post-IPO performance: The Chinese evidence. Journal of Banking & Finance, 33(1), 63-76. Kasznik, R. (2004). Discussion of "the effect of accounting restatements on earnings revisions and the estimated cost of capital". Review of Accounting Studies, 9(2-3), 357-367. KielholzÃ, W. (2000). The cost of capital for insurance companies. Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33, 375-400. Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The review of economics and statistics, 47(1), 13-37. National Corporate Governance Committee. (2013). Definitions of Corporate Governance. Retrieved 25 June, 2013, from http://www.cgthailand.org/SetCG/about/about_en.html OECD. (2004). OECD Principles of Corporate Governance: Organisation for Economic Co-Operation and Development. Park, Y. W., & Shin, H.-H. (2004). Board composition and earnings management in Canada. Journal of Corporate Finance, 10, 431-457. Peasnell, K., Pope, P., & Young, S. (2004). Board monitoring and earnings management: Do outside directors influence abnormal accruals? The department of Accounting and Finance Lancaster university management school, 1-45. Poshakwale, S., & Courtis, J. K. (2005). Disclosure level and cost of equity capital: Evidence from the banking industry. Managerial and Decision Economics, 26(7), 431-444. Reverte, C. (2009). Do better governed firms enjoy a lower cost of equity capital?: Evidence from Spanish firms. Corporate Governance, 9(2), 133-145. Richardson, A., & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26(7), 597-616.
Rosenberg, B., Reid, K., & Lanstein, R. (1985). Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9-16. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equlibrium under Conditions of Risk The Journal of Finance, 19(3), 425-442. Stehle, R., Ehrhardt, O., & Przyborowsky, R. (2000). Long-run stock performance of German initial public offerings and seasoned equity issues. European Financial Management, 6(2), 173-796. Strobl, G. (2013). Earnings Manipulation and the Cost of Capital. Journal of Accounting Research, 51(2), 443-479. Subramanyam, K. R. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22, 249-281. Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings Management and the Long-Run Market Performance of Initial Public Offerings. The Journal of Finance 13(6), 1935-1974. Torres-Reyna, O. (2010). Panel Data AnalysisFixed & Random Effects. Retrieved from http://dss.princeton.edu/traning/ Upadhyay, A., & Sriram, R. (2011). Board size, corporate information environment and cost of capital. Journal of Business Finance and Accounting, 38(9-10), 1238-1261. Welch, I. (2008). The consensus estimate for the equity premium by academic financial economists in December 2007. Available at SSRN 1084918. Xie, B., Davidson, W., & DaDalt, P. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9, 295-316. Zouari, A., & Rebaï, I. (2009). Institutional ownership differences and earnings management: A neural networks approach. International Research Journal of Finance and Economics, 34, 42-55.
References
Abed, S., Al-Attar, A., & Suwaidan, M. (2012). Corporate Governance and Earnings Management: Jordanian Evidence. International Business Research, 5(1), 216-225. Ahmad, A., Saleh, N. M., Iskandar, T. M., & Alias, M. A. (2011). The monitoring role of institutional investors and earning opacity. Peranan pengawasan pelabur institusi dan kekaburan perolehan, 32, 83-101. Ali Shah, S. Z., Butt, S. A., & Hasan, A. (2009). Corporate Governance and Earnings Management an Empirical Evidence Form Pakistani Listed Companies. European Journal of Scientific Research, 26(2), 624-638. Ashton, D. (1995). The cost of equity capital and a generalisation of the dividend growth model. Accounting and business research, 26(1), 3-17. Banko, J., Frye, M. B., Wang, W., & Whyte, A. M. (2013). Earnings management and annual general meetings: The role of managerial entrenchment. Financial Review, 48(2), 259-282. Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3-18. Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. The Journal of Finance, 32(3), 663-682. Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24. Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing, 23(2), 13-35. Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The Journal of Finance, 43(2), 507-528. Bhattacharya, N., Desai, H., & Venkataraman, K. (2013). Does earnings quality affect information asymmetry? Evidence from trading costs. Contemporary Accounting Research, 30(2), 482-516. Bhattacharya, U., Daouk, H., & Welker, M. (2003). The world price of earnings opacity. The accounting review, 78(3), 641-678. Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2), 112-131. Black, F. (1972). Capital market equilibrium with restricted borrowing. The Journal of Business, 45(3), 444-455. Botosan, C., Plumlee, M., & Xie, Y. (2004). The role of information precision in determining the cost of equity capital. Review of Accounting Studies, 9(2-3), 233-259.
Brennan, N., & Solomon, J. (2008). Corporate governance, accountability and mechanisms of accountability: an overview. Accounting, Auditing & Accountability Journal, 21(7), 885-906. Chen, H., Chen, J. Z., Lobo, G., & Wang, Y. (2011). Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China. Contemporary Accounting Research, 28(3), 892-925. Cheng, C. A., Collins, D., & Huang, H. H. (2006). Shareholder rights, financial disclosure and the cost of equity capital. Review of Quantitative Finance and Accounting, 27(2), 175-204. Cornett, M. M., Marcus, A. J., & Tehranian, H. (2008). Corporate governance and pay-for-performance: The impact of earnings management. Journal of Financial Economics, 87(2), 357-373. Da, Z., Guo, R.-J., & Jagannathan, R. (2012). CAPM for estimating the cost of equity capital: Interpreting the empirical evidence. Journal of Financial Economics, 103(1), 204-220. Dao, M., Huang, H. W., & Zhu, J. (2012). The effects of audit committee members' age and additional directorships on the cost of equity capital in the usa. European Accounting Review. Davidson, R., Goodwin-Stewart, J., & Kent, P. (2005). Internal governance structures and earnings management. Accounting and Finance, 45(2), 241-267. Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, Y. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The accounting review, 86(1), 59-100. Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The accounting review, 86(1), 59-100. Eaton, T. V., Nofsinger, J. R., & Weaver, D. G. (2007). Disclosure and the cost of equity in international cross-listing. Review of Quantitative Finance and Accounting, 29(1), 1-24. Ebrahim, A. (2007). Earnings management and board activity: an additional evidence. Review of Accounting and Finance, 6(1), 42-58. El Ghoul, S., Guedhami, O., Kwok, C. C. Y., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance, 35(9), 2388-2406. Epps, R. W., & Guthrie, C. P. (2010). Sarbanes-Oxley 404 material weaknesses and discretionary accruals. Accounting Forum, 34, 67-75. Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2), 187-243. Gray, P., Koh, P. S., & Tong, Y. H. (2009). Accruals quality, information risk and cost of capital: Evidence from Australia. Journal of Business Finance and Accounting, 36(1-2), 51-72. Harris, R. S., Marston, F. C., Mishra, D. R., & O'Brien, T. J. (2003). Ex ante cost of equity estimates of S&P 500 firms: The choice between global and domestic CAPM. Financial Management, 51-66. Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and its implications for Standard Setting. American Accounting Association Accounting Horizons, 13(4), 365-383. Hribar, P., & Collins, D. W. (2002). Errors in Estimating Accruals: Implications for Empirical Research. Journal of Accounting Research, 40(1), 105-134. doi: 10.1111/1475-679x.00041
Hribar, P., & Jenkins, N. T. (2004). The effect of accounting restatements on earnings revisions and the estimated cost of capital. Review of Accounting Studies, 9(2-3), 337-356. Huang, H., Wang, Q., & Zhang, X. (2009). The effect of CEO ownership and shareholder rights on cost of equity capital. Corporate Governance, 9(3), 255-270. Jagannathan, R., & Meier, I. (2002). Do we need CAPM for capital budgeting? : National Bureau of Economic Research. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. Johl, S., Jubb, C. A., & Houghton, K. A. (2007). Earnings management and the audit opinion: evidence from Malaysia. Managerial Auditing Journal, 22(7), 688-715. Jonas, G., & Blanchet, J. (2000). Assessing quality of financial reporting. Accounting Horizons, 14(3), 353363. Kao, J. L., Wu, D., & Yang, Z. (2009). Regulations, earnings management, and post-IPO performance: The Chinese evidence. Journal of Banking & Finance, 33(1), 63-76. Kasznik, R. (2004). Discussion of "the effect of accounting restatements on earnings revisions and the estimated cost of capital". Review of Accounting Studies, 9(2-3), 357-367. KielholzÃ, W. (2000). The cost of capital for insurance companies. Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33, 375-400. Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The review of economics and statistics, 47(1), 13-37. National Corporate Governance Committee. (2013). Definitions of Corporate Governance. Retrieved 25 June, 2013, from http://www.cgthailand.org/SetCG/about/about_en.html OECD. (2004). OECD Principles of Corporate Governance: Organisation for Economic Co-Operation and Development. Park, Y. W., & Shin, H.-H. (2004). Board composition and earnings management in Canada. Journal of Corporate Finance, 10, 431-457. Peasnell, K., Pope, P., & Young, S. (2004). Board monitoring and earnings management: Do outside directors influence abnormal accruals? The department of Accounting and Finance Lancaster university management school, 1-45. Poshakwale, S., & Courtis, J. K. (2005). Disclosure level and cost of equity capital: Evidence from the banking industry. Managerial and Decision Economics, 26(7), 431-444. Reverte, C. (2009). Do better governed firms enjoy a lower cost of equity capital?: Evidence from Spanish firms. Corporate Governance, 9(2), 133-145. Richardson, A., & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26(7), 597-616.
Rosenberg, B., Reid, K., & Lanstein, R. (1985). Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9-16. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equlibrium under Conditions of Risk The Journal of Finance, 19(3), 425-442. Stehle, R., Ehrhardt, O., & Przyborowsky, R. (2000). Long-run stock performance of German initial public offerings and seasoned equity issues. European Financial Management, 6(2), 173-796. Strobl, G. (2013). Earnings Manipulation and the Cost of Capital. Journal of Accounting Research, 51(2), 443-479. Subramanyam, K. R. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22, 249-281. Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings Management and the Long-Run Market Performance of Initial Public Offerings. The Journal of Finance 13(6), 1935-1974. Torres-Reyna, O. (2010). Panel Data AnalysisFixed & Random Effects. Retrieved from http://dss.princeton.edu/traning/ Upadhyay, A., & Sriram, R. (2011). Board size, corporate information environment and cost of capital. Journal of Business Finance and Accounting, 38(9-10), 1238-1261. Welch, I. (2008). The consensus estimate for the equity premium by academic financial economists in December 2007. Available at SSRN 1084918. Xie, B., Davidson, W., & DaDalt, P. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9, 295-316. Zouari, A., & Rebaï, I. (2009). Institutional ownership differences and earnings management: A neural networks approach. International Research Journal of Finance and Economics, 34, 42-55.