S-Space College of Business Administration/Business School (경영대학/대학원) Dept. of Business Administration (경영학과) Theses (Ph.D. / Sc.D._경영학과)
Three Essays on the Cost of Equity : 자본비용에 관한 세 개의 연구
- 경영대학 경영학과
- Issue Date
- 서울대학교 대학원
- IFRS adoption ; European banks ; legal enforcement ; banking regulation ; vector autoregression ; return decomposition ; accruals quality ; cost of equity ; expected return ; financial flexibility ; cash holdings ; leverage ; cash flow shocks
- 학위논문 (박사)-- 서울대학교 대학원 : 경영학과, 2014. 8. 황이석.
- This dissertation consists of three essays which connect accounting information and the cost of equity. Because the cost of equity is critical for firm valuation, this dissertation provides evidence that supports the usefulness of accounting information.
The first essay examines the effect of International Financial Reporting Standards (IFRS) adoption, which was mandated in 2005, on the cost of equity capital in European banks. On average, mandatory IFRS adoption does not affect the cost of equity capital of European banks. I further examine the influence of institutional environments and the extent of changes in accounting standards from mandatory IFRS adoption on the cost of equity. Mandatory IFRS adoption decreases the cost of equity in countries where legal enforcement is strong and the extent of changes in accounting standards by mandatory IFRS is large. On the other hand, mandatory IFRS adoption increases the cost of equity where the power of the bank supervisor is strong and the enhancement of comparability by IFRS adoption is large. This highlights the importance of institutional environments in the adoption of new accounting standards and in the economic consequences of the adoption.
The second essay reexamines the test on the pricing of accruals quality (AQ) in Ogneva (2012) by using the expected returns estimated by the autoregression model of Vuolteenaho (2002). The method of Ogneva (2012) has two concerns: first, except for a small portion that is captured by earnings surprises, most information shocks are not removed from the proxy for expected returns. Second, the difference in measurement periods of accounting earnings and returns could cause a bias in the estimation of information shocks. By using expected returns estimated by the autoregression model of Vuolteenaho (2002), I find evidence that supports the conjecture that AQ is a priced risk factor. In subsample analyses, the pricing of AQ is observed only in recession periods. As risk premiums are larger in recession periods, this can be interpreted as additional evidence that supports the main findings.
The third essay investigates the relation between expected returns and financial flexibility. Prior studies on the influence of the two indicators of a firms financial flexibility in financial statements, cash holdings and financial leverage, on expected returns are generally based on the inaccurate premise that cash holdings are negative debts (Acharya et al. 2007). I reinvestigate this issue by separating cash holdings from leverage. To control the influence of financial flexibility on information shocks, I decompose stock returns to calculate the proxy for expected returns by using a vector autoregression (VAR) method (Vuolteenaho 2002). Empirical analyses find significant and positive relations between expected returns and both cash holdings and leverage. Furthermore, the relations are independent with each other, which imply that cash holdings should not be treated as negative debts in asset pricing tests. I also construct an aggregate financial flexibility measure which is conceptually the inverse of the traditional leverage measure that is calculated from net debts. This aggregate financial flexibility is found to be positively related to expected returns. Therefore my results imply that the inaccurate proxy of leverage is the reason why prior studies fail to find a positive relation between leverage and returns. The positive relations are stronger in market downturns, which shows that firm risks drive the relation between expected returns and measures of financial flexibility.