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Do Investors Price Accruals Quality? A Reexamination in the Implied Cost of Equity Capital


  • Acknowledgements We appreciate comments and suggestions by two anonymous referees and seminar participants at Seoul National University. This paper was supported by the faculty research program of Kookmin University in Korea. Hwang also appreciates financial support from the Institute of Management Research and a BK Research Grant by Seoul National University. All remaining errors are our own.

Corresponding author: Seung-Yeon Lim, College of Business Administration, Kookmin University, Jeongneung-dong, Seongbuk-gu, Seoul 136-702, Korea. Tel: +82-2-9105528, Fax: +82-2-910-5209, email:


This study investigates whether accruals quality (AQ) influences the expected returns of stock investors. We employ estimates of the implied cost of equity capital (ICOE) as the expected returns of stock investors because they are well specified ex ante without the need for noisy realized returns. Extending a current debate on AQ pricing, we control for several properties of analysts’ forecasts and find that AQ is positively and significantly related to ICOE. In addition, AQ is more closely related to the innate component than to the discretionary component. However, even after controlling for innate factors, we find that investors also price the discretionary component. Finally, we show that the relationship between AQ and ICOE is more pronounced for firms in poor information environments, such as small firms and firms with a low analyst following, implying that a firm’s information environment influences the relationship between AQ and ICOE.