Resumo

The relationship between accounting data and the cost of capital is one of the fundamental problems in accounting (Lambert et al., 2007). However, this relationship is where the literature is divided. The impact of accrual quality in particular and the quality of accounting information generally on the cost of capital for researchers and professionals needs to be further examined (Core et al., 2008).

This study aims to examine the relationship between accounting information quality, earnings management, and the cost of equity, specifically focusing on the impact of information quality on the cost of equity.

Arora and Chauhan (2022) analyzed the impact of financial statement readability on earnings management in Indian companies from 2007 to 2019. They found that companies that practice earnings management have less readable financial reports, even after controlling for firm-specific characteristics. This makes the reports more difficult to understand. Paul and Sharma (2023) investigated several alternative obscuration strategies, based on a sample of management discussion and analysis (MD&A) disclosures of US.

The study utilizes the Fog Index model to measure the complexity of reading press releases and discretionary accruals. Ex-ante and ex-post proxies are employed to predict the cost of equity, and the interaction between variables of interest (readability and earnings management) is explored.

The results found in this study do not support the presented hypothesis H1, demonstrating that there is no robust evidence of a possible consistent association between the quality of accounting information and the cost of equity. The results presented bring yet another contribution to be added to the divergent literature on the subject and oppose previous studies, whose findings support this relationship, to endogeneity problems, which this work sought to reduce through the use of two quality metrics of information, including the interaction between them.

Unlike previous studies, this research examined the various aspects of accounting information quality, including the readability of performance reports presented by companies to the market. Furthermore, we adopted the approach of Lo et al. (2017), who discussed the impact of earnings management on readability, in order to avoid endogeneity problems in the proposed empirical models when evaluating the joint effect of readability and earnings management on the cost of equity.

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