A Returns-Based Representation of Earnings Quality

Ecker, Frank; Francis, Jennifer; Kim, Irene; Olsson, Per; Schipper, Katherine

doi:10.1521/accr.2006.81.4.749

Cited by 46 publications

(65 citation statements)

References 30 publications

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“…Altman's Z-score, composite score indicating the distance to bankruptcy, defined as (3.3*(data15+data16+data18+data49)/data6+1.0*data12/data6+1.4*data36/data6+ 1.2*(data4-data5)/data6+0.6*data199*data25/ (data9+data34) Earnings quality The negative of the loadings on the accrual quality (AQ) factor as augmented from the Fama-French three-factor model, where AQ is defined as the standard deviation of the residuals from the regressions of the change in working capital on past, current, and future cash flow from operations (Ecker, Francis, Kim, Olsson, and Schipper (2006)). …”

Section: L-indexmentioning

confidence: 99%

“…The spread for an individual bond is defined as the difference between the yield-to-maturity (YTM) of the bond and the YTM of the U.S. Treasury Bond with the closest maturity. In the spread regressions, we also control for 9 Ecker et al, (2006) calculate what they label as "e-loading," which is a measure of a firm's earnings quality. The measure is based on an accrual quality (AQ) measure, which is defined as the standard deviation of the residuals of a time-series regression of the firm's total current accruals on past, present, and future values of the firm's cash flows from operations, the firm's most recent change in revenues and the level of the firm's property, plant and equipment for each of the preceding five years.…”

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confidence: 99%

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Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions

Bradley

Chen

2011

Journal of Corporate Finance

130

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We find that firms that provide limited liability and indemnification for their directors enjoy higher credit ratings and lower yield spreads. We argue that such provisions insulate corporate directors from the discipline from potential litigation, and allow them to pursue their own interests by adopting low-risk, self-serving operating strategies, which coincidentally redound to the benefit of corporate bondholders. Our evidence further suggests that the reduction in the cost of debt may offset the costs of directorial shirking and suboptimal corporate policies occasioned by this insulation, which may explain why stockholders have little incentive to rescind these legal protections.

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Section: L-indexmentioning

confidence: 99%

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confidence: 99%

Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions

Bradley

Chen

2011

Journal of Corporate Finance

130

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“…Botosan (1997) and Botosan and Plumlee (2002) show that firms disclosing more information in their annual reports have lower cost of capital. Francis et al (2004Francis et al ( , 2005 and Ecker et al (2006) proxy for accounting quality using residual accruals volatility and find similar results. Chen, Berger, and Li (2006) also provide evidence that more firm-specific information in stock returns is related to a lower cost of equity.…”

Section: Discussionmentioning

confidence: 56%

A theory of voluntary disclosure and cost of capital

Cheynel

2013

Rev Account Stud

137

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This paper explores the links between firms' voluntary disclosures and their cost of capital. I relate the differences in costs of capital between disclosing and nondisclosing firms to disclosure frictions and equity risk premia. Specifically, I show that firms that voluntary disclose their information have a lower cost of capital than firms that do not disclose. I also examine the extent to which reductions in cost of capital map into improved risk-sharing and/or greater productive efficiency. I prove that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. Economic efficiency decreases as the disclosure friction increases because of inefficient production in an underinvestment equilibrium. As the disclosure friction continues to increase, the equilibrium switches to overinvestment and further increases in the disclosure friction improve risk-sharing. Importantly the relation between average cost of capital and economic efficiency is ambiguous. A decrease in average cost of capital in the economy only implies an increase in economic efficiency if there is overinvestment. *

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“…Francis et Al. (2004 and Ecker et Al. (2006) proxy for accounting quality using residual accruals volatility and find similar results.…”

Section: Proposition 7 For V > Vmentioning

confidence: 96%