Despite the increasing integration of global capital markets, there is little evidence on the valuation properties of cross-listed, non-U.S. firms' accounting variables. We use the relative performance of the earnings capitalization, the book value, and the residual income valuation models to explore the valuation properties of International Accounting Standards and U.S. Generally Accepted Accounting Principles earnings and book values reported by non-U.S., cross-listed firms trading in a common equity market. Using non-U.S./non-U.K. firms whose shares trade on the International Stock Exchange Automated Quotation system in London, we find that the earnings capitalization model is the dominant accounting-based valuation model when crosslisted firms report under International Accounting Standards. In contrast, we find that when cross-listed firms report under U.S. Generally Accepted Accounting Principles, the residual income model is the dominant accountingbased valuation model. Our exploratory study provides insights into the valuation implications of allowing a dual reporting system for foreign registrants trading in a common equity market.

ABSTRACT We investigate the relations among voluntary disclosure, earnings quality, and cost of capital. We find that firms with good earnings quality have more expansive voluntary disclosures (as proxied by a self‐constructed index of coded items found in 677 firms' annual reports and 10‐K filings in fiscal 2001) than firms with poor earnings quality. In unconditional tests, we find that more voluntary disclosure is associated with a lower cost of capital. However, consistent with the complementary association between disclosure and earnings quality, we find that the disclosure effect on cost of capital is substantially reduced or disappears completely (depending on the cost of capital proxy) once we condition on earnings quality. Extensions probing alternative proxies show that our findings are robust to measures of earnings quality and cost of capital, but not to other measures of voluntary disclosure. In particular, we find opposite relations for voluntary disclosure measures based on management forecasts and conference calls, and we find no relations for a press release based measure.

We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ) versus management choices (discretionary AQ). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.

Jennifer Francis, Per Olsson, Dennis R. Oswald, Comparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimates, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 45-70

Abstract This paper investigates how data requirements often encountered in archival accounting research can produce a data-restricted sample that is a non-random selection of observations from the reference sample to which the researcher wishes to generalize results. We illustrate the effects of non-random sampling on results of association tests in a setting with data on one variable of interest for all observations and frequently-missing data on another variable of interest. We develop and validate a resampling approach that uses only observations from the data-restricted sample to construct distribution-matched samples that approximate randomly-drawn samples from the reference sample. Our simulation tests provide evidence that distribution-matched samples yield generalizable results. We demonstrate the effects of non-random sampling in tests of the association between realized returns and five implied cost of equity metrics. In this setting, the reference sample has full information on realized returns, while on average only 16% of reference sample observations have data on cost of equity metrics. Consistent with prior research (e.g., Easton and Monahan The Accounting Review 80, 501–538, 2005), analysis using the unadjusted (non-random) cost of equity sample reveals weak or negative associations between realized returns and cost of equity metrics. In contrast, using distribution-matched samples, we find reliable evidence of the theoretically-predicted positive association. We also conceptually and empirically compare distribution-matching with multiple imputation and selection models, two other approaches to dealing with non-random samples.

We examine how the criteria for choosing estimation samples affect the ability to detect discretionary accruals, using several variants of the Jones (1991) model. Researchers commonly estimate accruals models in cross-section, and define the estimation sample as all firms in the same industry. We examine whether firm size performs at least as well as industry membership as the criterion for selecting estimation samples. For U.S. data, we find estimation samples based on similarity in lagged assets perform at least as well as estimation samples based on industry membership at detecting discretionary accruals, both in simulations with seeded accruals between 2% and 100% of total assets and in tests examining restatement data and AAER data. For non-U.S. data, we find industry-based estimation samples result in significant sample attrition and estimation samples based on lagged assets perform at least as well as estimation samples based on industry membership, both in simulations and in tests examining German restatement data, with substantially less sample attrition.

We examine the relation between the cost of equity capital and seven attributes of earnings: accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism. We characterize the first four attributes as accounting-based because they are typically measured using accounting information only. We characterize the last three attributes as market-based because proxies for these constructs are typically based on relations between market data and accounting data. Based on theoretical models predicting a positive association between information quality and cost of equity, we test for and find that firms with the least favorable values of each attribute, considered individually, generally experience larger costs of equity than firms with the most favorable values. The largest cost of equity effects are observed for the accounting-based attributes, in particular, accrual quality. These findings are robust to controls for innate determinants of the earnings attributes (firm size, cash flow and sales volatility, incidence of loss, operating cycle, intangibles use/intensity, and capital intensity), as well as to alternative proxies for the cost of equity capital.

ABSTRACT For a broad sample of firms, we use structural equations modeling to construct latent variables for real-action aggressiveness and reporting policy aggressiveness. We estimate the association between the latent variables and the associations of each latent variable with shareholder payoffs (returns) and CEO payoffs (annual compensation to the CEO position). Results show the two types of aggressiveness are positively correlated but have different associations with the payoffs we consider. Greater policy-choice aggressiveness is associated with higher returns and compensation; the opposite is true for greater real-action aggressiveness. We find a positive association between policy-choice aggressiveness and restatement likelihood. Compared with nonrestatement firms, abnormal returns of restatement firms with aggressive policy choices are larger in the pre-restatement period and lower in the post-restatement period. Negative returns at the restatement announcement do not, on average, eliminate long-run (multi-year) positive returns of the pre-restatement period or of the period whose results are restated. JEL Classifications: M40; M41.

ABSTRACT Using path analysis, we investigate the direct and indirect links between three measures of earnings quality and the cost of equity. Our investigation is motivated by analytical models that specify both a direct link and an indirect link that is mediated by information asymmetry, but do not suggest which link would be more important empirically. We measure information asymmetry as both the adverse selection component of the bid-ask spread and the probability of informed trading (PIN). For a large sample of Value Line firms during 1993–2005, we find statistically reliable evidence of both a direct path from earnings quality to the cost of equity, and an indirect path that is mediated by information asymmetry, with the weight of the evidence favoring the direct path as the more important.