The Impacts of Accounting Information on the Cost of Capital of an Organization

Abstract

The relationship between accounting information and the cost of capital is demonstrated to be a fundamental issue in the accounting literature (Agrawal and Cooper, 2017) and has captured much more space in finance literature. Arthur Levitt, the former chairman of the United States Securities and Exchange Commission (SEC), suggested that high-quality accounting standards reduce the cost of capital as investors with high-quality information can make better investment decisions (Easton, 2004). Andre, Flip and Moldovan (2016) suggested that high-quality accounting information reduces uncertainty and that investors and firms attach much importance to such information. Accounting information available in financial reports is used to measure firms’ risk factors and estimate their expected returns (Gebhardt, Lee, & Swaminathan, 2001).
By using accounting information systems, decision-makers obtain useful information and use it in decision-making and strategy-building to achieve organizational goals and objectives, which should increase the company's performance. One of the key decisions a firm has to make is the fundamental determination of its cost of capital. This has a substantial impact on both the composition of the firm's operations and its profitability since shocks to anticipated cash flows are reflected in the firm’s cost of capital. Many studies have spent tons of ink coming up with proposals leading to a lower cost of capital. Argue that it is the environment of a firm, which is described by many parameters, such as accounting standards, market microstructure, and information coming from the firm reports, that influences the accounting type of information that determines the firm’s cost of capital and, consequently, its stock price.