An Empirical Research On The Relation Between Earnings Quality And The Cost Of Equity

Earnings Quality is of interest to equity investors, creditors and other participants in the capital market, contributed to the effectiveness of capital allocation in the capital market. In China's securities markets, in the process of the IPO, rights issue and equity raising, earnings quality is a very important benchmark construct. In many valuation models, earnings quality also is key inputs. So, how to analyze, measure and verify the capital consequence of earnings quality is fundamental to understanding why and how accounting matters to investors and others who participant in the capital markets.This dissertation use Dechow-Dichev(2002)accruals quality model to measure the earnings quality of China's A-listed companies, the GLS(2001)method to measure the cost of equity capital. And this paper investigates why, how and to what extent earnings quality mapped into the cost of equity capital. The empirical evidence indicates that poor earnings quality firms generally have higher cost of equity; the direct relation between earnings quality and the cost of equity capital is more important than the indirect relation between earnings quality and the cost of equity.The literature contributions of this research are that, the dissertation distinguishes the direct and indirect relationship between earnings quality and the cost of equity capital; empirically tests the direct and indirect relation between earnings quality and the cost of equity capital. And the relation between innate accruals quality and the cost of equity is explained as the direct relation between earnings quality and the cost of equity capital; the relation between discretionary accruals quality and the cost of equity capital is explained as the indirect relationship; taking the cross-sectional Dechow-Dichev(2002)accruals quality model to obtain a firm-specific, cross-sectional measure of accruals quality.