Research On Effect Of New Accounting Standards On The Relationship Between Earnings Transparency And Cost Of Capital

The importance of a company’s cost of capital is self-evident. Companies need to reduce the cost of capital to obtain greater profits for investment and financing activities. Evaluating the cost of capital will help managers make the right decisions. The cost of capital is an important reference for investors in investment activities. Investors to assess the economic value of a firm based on the cost of capital. Information disclosure can reduce the cost of capital. A company fully disclosed accounting information in accordance with GAAP to reduce the cost of capital. January 1, 2007, China began to implement the new corporate accounting standards. Studies have shown that the implementation of new accounting standards can improve the quality of accounting information. If the stock market reflects the increasing quality of accounting information, listed companies can reduce the cost of capital.This paper selects all A-share listed companies from 2001 to 2012 as samples to study the impact of new accounting standards on the relations between earnings transparency and the cost of capital. Earnings transparency is the explanation power of earnings and unexpected earnings to stock return. It not only contains earnings information, but also includes the reaction of stock market to earnings information. First, this paper calculates earnings transparency based on the model constructed by Barth and calculates the cost of capital using Fama-French three-factor model. Then this paper analyzes the relationship between earnings transparency and the cost of equity capital with OLS. Secondly, the paper selected two important changes in the new accounting standards, the change of consolidated financial statements theory and the introduction of fair value, to study the effect of new accounting standards on earnings transparency. This paper compares earnings transparencies before and after deducting minority interests using the t test, and analyzes the impact of the consolidated statements theory on earnings transparency. This paper also compares earnings transparencies before and after deducting gains and losses from changes in fair value using the t test, and analyzes the impact of gains and losses from changes in fair value on earnings transparency. Finally, the study takes new accounting standards as a dummy variable and constructs a regression of the cost of capital on new accounting standards and earnings transparency, then analyzes the effect of new accounting standards on the relationship between earnings transparency and cost of capital.Results of this study show that earnings transparency is significantly negatively correlated with cost of equity capital. Results indicate that improving the level of accounting information disclosure and increasing earnings transparency can reduce the cost of capital for listed companies. Earnings transparency decreases after deducting minority interests. The result indicates that the change of consolidated statements theory increases earnings transparency. Earnings transparency decreases after deducting gains and losses from changes in fair value. The result indicates that the introduction of fair value increases earnings transparency. Overall, the new accounting standards improve the earnings transparency. The new accounting standards are significantly negatively correlated with the cost of capital. The result indicates that the implementation of new accounting standards weaks the correlation between the cost of capital and earnings transparency.