Business, Management and Accounting
4 years ago

Real Earnings Manipulation Leads to Higher Cost of Equity Capital

SSRN Electronic Journal
Real versus Accrual-Based Earnings Management and Implied Cost of Equity Capital
Jeong‐Bon Kim, Byungcherl Charlie Sohn

Paper Summary

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The cost of equity capital for a company is affected by how much they manipulate their earnings. Real activities manipulation has a stronger impact on the cost of capital compared to accrual-based manipulation. Investors consider the Sarbanes-Oxley Act when deciding on investments. Real earnings manipulation reduces the quality of earnings more than accrual-based manipulation, leading to a higher risk premium demanded by the market.