• The Economic Consequences of Information Risk: Accounting Information Quality Perspective

Abstract

The main purpose of this paper is to study whether accounting information quality affects the cost of equity capital. Past studies have shown that different research methods or different regions of the sample may lead to different results on this issue. Therefore, it is necessary to investigate this topic with data from Taiwan. In the past, scholars have usually used general regression models or multifactor models to study this issue. However, both of these methods have their own problems. Referring to Cohen (2008) and Core, Guay, and Verdi (2008), this paper uses the listed firms in Taiwan as the research sample to explore the relationship between accounting information quality and the cost of equity capital. The empirical results show that, in the general regression model, whether or not its endogenous nature is controlled for, accounting information quality is significantly negatively related to the cost of equity capital. The results of the asset pricing model also support this point. To sum up, this paper provides evidence that the information risk resulting from accounting information quality affects both nonsystematic and systematic risk. Hence, accounting information quality is priced by investors.

Keywords: accounting information quality, information risk, cost of equity capital