Quality or quantity? The impact on the cost of equity capital

Telles, Samantha Valentim; Moreira, Jeice Catrine Cordeiro

doi:10.1590/1808-057x20241928.en

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Original Article • Rev. contab. finanç. 35 (95) • 2024 • https://doi.org/10.1590/1808-057x20241928.en copy

Quality or quantity? The impact on the cost of equity capital

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This study aimed to investigate the simultaneous impact of information quality and quantity on the cost of equity capital for Brazilian firms listed on the B3 from 2011 to 2021. We also assessed which of the two, quality or quantity, has a greater impact on the cost of equity capital. Accounting quality and information volume are key factors in determining a company's cost of equity capital. While several studies have explored the relationship between these variables, few have examined them simultaneously, and we were unable to find any that focused on these aspects in the Brazilian market. Our results suggest that companies should prioritize enhancing the quality of information they disclose to investors over simply disclosing more information. Standard setters have a rationale for providing additional guidance on improving information disclosure. A better informed market facilitates better decision-making and reduces information asymmetry. Our results contradict previous studies that have found a positive relationship between information quantity and the cost of equity capital, suggesting that future research on information volume must also consider the quality of that information. We used a sample of 1,347 firm-year observations and employed various methodologies to assess the levels of accounting quality and information volume. Our study controlled for firm size, leverage, market-to-book ratio, beta, growth, internationalization, and the impact of COVID-19 to enhance the robustness of our results. To ensure the validity of our findings, we conducted additional tests using alternative methods to measure quality and quantity, and the results were consistent with our original findings. We found that the quality of financial information impacts the cost of equity capital, whereas the volume does not. Our results underscore the importance of improving information quality and support regulatory requirements for more relevant and understandable disclosure.

Keywords:
cost of equity capital; information quality; information volume; readability

Variable	Operationalization	References
Size	Logarithm of total assets	Francis, Khurana & Pereira (2005Francis, J., Khurana, I., & Pereira, R. (2005). Disclosure Incentives and Effects on Cost of Capital around the World. The Accounting Review, 80(4), pp. 1125-1162.) Francis, Nanda, & Olsson (2008Francis, J., Nanda, D., & Olsson, A. (2008). Voluntary Disclosure, Earnings Quality, and Cost of Capital. Journal of Accounting Research, 46(1), pp. 53-99. doi:10.1111/j.1475-679X.2008.00267.x) Lopes & Alencar (2008) Silva (2013Silva, R. L. (2013). Adoção completa das IFRS no Brasil: Qualidade das demonstrações contábeis e o custo de capital próprio. Tese de Doutorado, Universidade de São Paulo, Contabilidade e Atuária, São Paulo.) Gonçalves et al. (2013Gonçalves, R., Medeiros, O., Niyama, J., & Weffort, E. 2013. Social Disclosure e Custo de Capital Próprio em Companhias Abertas no Brasil. Revista Contabilidade & Finanças, 24(62), pp. 113-124. doi:https://doi.org/10.1590/S1519-70772013000200003 https://doi.org/10.1590/S1519-7077201300... ) Silva & Pinheiros (2015Silva, A., Pletsch, C., Klann, R., Fasolin, L., & Scarpin, J. (2015). Influence of international accounting convergence on the level of earnings management in both Brazilian and Chilean companies. In I. Lourenço, & M. Major, Standardization of financial reporting and accounting in Latin American countries (pp. 195-215). IGI Global.) Manoel, Eça, & Moraes (2016Manoel, A., Eça, J., & Moraes, M. (2016). Custo do capital próprio em empresas brasileiras do setor sucroenergético: um estudo considerando a adoção das normas internacionais de contabilidade. Revista Universo Contábil, 12(2), pp. 17-137. doi:10.4270/ruc.2016217) Gatsios et al. (2016Gatsios, R., Silva, J., Ambrozini, M., Assaf Neto, A., & Lima, F. (2016). Impact of adopting IFRS standard on the equity cost of Brazilian open capital companies. Revista de Administração Mackenzie, 17(4), pp. 85-108. doi:http://dx.doi.org/10.1590/1678-69712016/administracao.v17n4p84-107 http://dx.doi.org/10.1590/1678-69712016/... ) Habib, Bhuiyan, & Hasan (2019Habib, A., Bhuiyan, M., & Hasan, M. (2019). IFRS adoption, financial reporting quality and cost of capital: a life cycle perspective. Pacific Accounting Review, 31(3), pp. 497-522. doi:10.1108/PAR-08-2016-0073) Athanasakou et al. (2020Athanasakou, V., Eugster, F., Schleicher, T., & Walker, M. (2020). Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shapped Relation. European Accounting Review, 29(1), pp. 27-54. doi:https://doi.org/10.1080/09638180.2019.1707102 https://doi.org/10.1080/09638180.2019.17... ) Yamani, Hussainey, & Albitar (2021Yamani, A., Hussainey, K., & Albitar, K. (2021). The impact of financial instruments disclosures on the cost of equity capital. International Journal of Accounting & Information Management, 29(4), pp. 528-551. doi:10.1108/IJAIM-02-2021-0052) Elshandidy & Acheampong (2021Elshandidy, T., & Acheampong, A. (2021). Does hedge disclosure influence cost of capital for European banks? International Review of Financial Analysis, 78, pp. 1-23. doi:https://doi.org/10.1016/j.irfa.2021.101942 https://doi.org/10.1016/j.irfa.2021.1019... )
Leverage (LEV)	Total liabilities divided by total assets	Francis, Khurana, & Pereira (2005Francis, J., Khurana, I., & Pereira, R. (2005). Disclosure Incentives and Effects on Cost of Capital around the World. The Accounting Review, 80(4), pp. 1125-1162.) Dhaliwal et al. (2011Dhaliwal, D., Li, O., Tsang, A., & Yang, Y. (2011). Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review, 86(1), pp. 59-100. doi:10.2308/accr.00000005) Ghoul, Guedhami, & Pittman (2016Ghoul, S., Guedhami, O., & Pittman, J. (2016). Cross-country evidence on the importance of Big Four auditors to equity pricing: The mediating role of legal institutions. Accounting, Organizations and Society, 54, pp. 60-81. doi:http://dx.doi.org/10.1016/j.aos.2016.03.002 http://dx.doi.org/10.1016/j.aos.2016.03.... ) Manoel, Eça, & Moraes (2016Manoel, A., Eça, J., & Moraes, M. (2016). Custo do capital próprio em empresas brasileiras do setor sucroenergético: um estudo considerando a adoção das normas internacionais de contabilidade. Revista Universo Contábil, 12(2), pp. 17-137. doi:10.4270/ruc.2016217) Habib, Bhuiyan, & Hasan (2019Habib, A., Bhuiyan, M., & Hasan, M. (2019). IFRS adoption, financial reporting quality and cost of capital: a life cycle perspective. Pacific Accounting Review, 31(3), pp. 497-522. doi:10.1108/PAR-08-2016-0073) Elshandidy & Acheampong (2021Elshandidy, T., & Acheampong, A. (2021). Does hedge disclosure influence cost of capital for European banks? International Review of Financial Analysis, 78, pp. 1-23. doi:https://doi.org/10.1016/j.irfa.2021.101942 https://doi.org/10.1016/j.irfa.2021.1019... )
Beta	The covariance of the stock price in relation to the market price	Gode & Mohanram (2003Gode, D., & Mohanram, P. (2003). Inferring the Cost of Capital Using the Ohlson-Juettner Model. Review of Accounting Studies, 8, pp. 399-431.) Hail & Leuz (2006Hail, L., & Leuz, C. (2006). International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? Journal of Accounting Research, 44(3), pp. 485-531.) Lopes & Alencar (2008) Francis, Nanda, & Olsson (2008Francis, J., Nanda, D., & Olsson, A. (2008). Voluntary Disclosure, Earnings Quality, and Cost of Capital. Journal of Accounting Research, 46(1), pp. 53-99. doi:10.1111/j.1475-679X.2008.00267.x) Dhaliwal et al. (2011Dhaliwal, D., Li, O., Tsang, A., & Yang, Y. (2011). Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review, 86(1), pp. 59-100. doi:10.2308/accr.00000005) Rover (2013Rover, S. (2013). Disclosure socioambiental e custo de capital próprio de companhias abertas no Brasil. Tese de Doutorado, Universidade de São Paulo, Contabilidade e Atuária, São Paulo.) Dhaliwal et al. (2016Dhaliwal, D., Judd, J., Serfling, M., & Shaikh, S. (2016). Customer concentration risk and the cost of equity capital. Journal of Accounting and Economics, 61, pp. 23-48.) Habib, Bhuiyan, & Hasan (2019Habib, A., Bhuiyan, M., & Hasan, M. (2019). IFRS adoption, financial reporting quality and cost of capital: a life cycle perspective. Pacific Accounting Review, 31(3), pp. 497-522. doi:10.1108/PAR-08-2016-0073) Athanasakou et al. (2020Athanasakou, V., Eugster, F., Schleicher, T., & Walker, M. (2020). Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shapped Relation. European Accounting Review, 29(1), pp. 27-54. doi:https://doi.org/10.1080/09638180.2019.1707102 https://doi.org/10.1080/09638180.2019.17... ) Ke (2022Ke, Y. (2022). The impact of COVID-19 on firm's cost of equity capital: Early evidence from U.S. public firms. Finance Research Letters, 46, pp. 1-8. doi:https://doi.org/10.1016/j.frl.2021.102242 https://doi.org/10.1016/j.frl.2021.10224... )
MB	Market to book ratio	Alencar (2005Alencar, R. C. (2005). Custo do Capital Próprio e Nível de Disclosure nas Empresas Brasileiras. BBR - Brazilian Business Review, 2(1), pp. 1-12.) Gode & Mohanram (2003Gode, D., & Mohanram, P. (2003). Inferring the Cost of Capital Using the Ohlson-Juettner Model. Review of Accounting Studies, 8, pp. 399-431.) Francis, Khurana, & Pereira (2005Francis, J., Khurana, I., & Pereira, R. (2005). Disclosure Incentives and Effects on Cost of Capital around the World. The Accounting Review, 80(4), pp. 1125-1162.) Dhaliwal et al. (2011Dhaliwal, D., Li, O., Tsang, A., & Yang, Y. (2011). Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review, 86(1), pp. 59-100. doi:10.2308/accr.00000005) Athanasakou et al. (2020Athanasakou, V., Eugster, F., Schleicher, T., & Walker, M. (2020). Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shapped Relation. European Accounting Review, 29(1), pp. 27-54. doi:https://doi.org/10.1080/09638180.2019.1707102 https://doi.org/10.1080/09638180.2019.17... ) Yamani, Hussainey, & Albitar (2021Yamani, A., Hussainey, K., & Albitar, K. (2021). The impact of financial instruments disclosures on the cost of equity capital. International Journal of Accounting & Information Management, 29(4), pp. 528-551. doi:10.1108/IJAIM-02-2021-0052)
Growth	Percentage growth in revenue	Lopes & Alencar (2008) Manoel, Eça, & Moraes (2016Manoel, A., Eça, J., & Moraes, M. (2016). Custo do capital próprio em empresas brasileiras do setor sucroenergético: um estudo considerando a adoção das normas internacionais de contabilidade. Revista Universo Contábil, 12(2), pp. 17-137. doi:10.4270/ruc.2016217) Habib, Bhuiyan, & Hasan (2019Habib, A., Bhuiyan, M., & Hasan, M. (2019). IFRS adoption, financial reporting quality and cost of capital: a life cycle perspective. Pacific Accounting Review, 31(3), pp. 497-522. doi:10.1108/PAR-08-2016-0073)
COVID	An indicator variable equal to 1 if 2020 or 2021 and 0 otherwise	Ke (2022Ke, Y. (2022). The impact of COVID-19 on firm's cost of equity capital: Early evidence from U.S. public firms. Finance Research Letters, 46, pp. 1-8. doi:https://doi.org/10.1016/j.frl.2021.102242 https://doi.org/10.1016/j.frl.2021.10224... )
ADR	An indicator variable equal to 1 if the firm has American Depositary Receipt (ADR) and 0 otherwise	Alencar (2005Alencar, R. C. (2005). Custo do Capital Próprio e Nível de Disclosure nas Empresas Brasileiras. BBR - Brazilian Business Review, 2(1), pp. 1-12.) Lopes & Alencar (2008) Rover (2013Rover, S. (2013). Disclosure socioambiental e custo de capital próprio de companhias abertas no Brasil. Tese de Doutorado, Universidade de São Paulo, Contabilidade e Atuária, São Paulo.) Silva (2013Silva, R. L. (2013). Adoção completa das IFRS no Brasil: Qualidade das demonstrações contábeis e o custo de capital próprio. Tese de Doutorado, Universidade de São Paulo, Contabilidade e Atuária, São Paulo.) Gonçalves et al. (2013Gonçalves, R., Medeiros, O., Niyama, J., & Weffort, E. 2013. Social Disclosure e Custo de Capital Próprio em Companhias Abertas no Brasil. Revista Contabilidade & Finanças, 24(62), pp. 113-124. doi:https://doi.org/10.1590/S1519-70772013000200003 https://doi.org/10.1590/S1519-7077201300... )

Year	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	Total
Panel A - CAPM
Observations	73	82	103	110	116	125	129	150	149	156	154	1,347
In %	5.4	6.1	7.6	8.2	8.6	9.3	9.6	11.1	11.1	11.6	11.4	100
Panel B - Modified PEG ratio
Observations	19	25	30	43	43	31	41	42	40	72	48	434
In %	4.4	5.8	6.9	9.9	9.9	7.1	9.4	9.7	9.2	16.6	11.1	100

	N.	Mean	Standard Deviation	Minimum	Median	Maximum
Dependent variables
CAPM	1,347	0.09	0.09	-0.65	0.09	0.90
mPEG	434	-1.66	0.64	-3.65	-1.67	1.06
Quantity estimates
WORDS	1,347	9.78	0.63	6.76	9.86	11.47
FLESCH	1,347	2.68	0.50	-0.93	2.72	3.98
Quality estimates
SMO	1,347	370.62	3,639.47	0.00	1.62	84,378.9
ACC	1,347	2.33	21.26	0.00	0.88	510.11
Control variables
SIZE	1,347	22.03	1.81	15.60	21.97	27.62
LEV	1,347	1.10	4.57	0.00	0.59	70.37
MB	1,347	1.60	4.46	-44.54	0.89	65.04
BETA	1,347	-0.03	0.86	-5.98	0.01	4.25
GROWTH	1,347	0.29	3.69	-9.16	0.08	126.49
COVID	1,347	0.23		0	0	1
ADR	1,347	0.23		0	0	1

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)
(1) CAPM	1
(2) mPEG	0.027	1
(3) WORDS	0.025	-0.000	1
(4) FLESCH	0.018	-0.018	0.274^***	1
(5) SMO	-0.017	-0.032	-0.000	-0.006	1
(6) ACC	0.001	-0.058	-0.159^***	-0.038	-0.010	1
(7) SIZE	0.002	0.130^***	0.688^***	0.206^***	0.054^**	-0.264^***	1
(8) LEV	0.025	0.051	-0.165^***	0.013	0.003	0.469^***	-0.318^***	1
(9) MB	-0.026	-0.355^***	0.032	0.024	-0.005	-0.035	0.049	-0.038	1
(10) BETA	-0.029	0.062	0.029	0.034	-0.020	-0.016	0.030	-0.079^***	-0.036	1
(11) GROWTH	-0.016	0.102^**	-0.074^***	0.006	-0.002	0.005	-0.062^**	0.005	-0.001	-0.010	1

	Full - CAPM (1)	Full - mPEG (2)	Quantity - CAPM (3)	Quantity - mPEG (4)	Quality - CAPM (5)	Quality - mPEG (6)
WORDS	0.0026	-0.0673	0.002	-0.0852
WORDS	(0.016)	(0.203)	(0.016)	(0.202)
FLESCH	0.0003	-0.0265	0.0004	-0.0315
FLESCH	(0.007)	(0.098)	(0.007)	(0.098)
SMO	-0.0000^**	-0.0000^*			-0.0000^**	-0.0000^*
SMO	(0.000)	(0.000)			(0.000)	(0.000)
ACC	-0.0002^***	0.0129			-0.0002^***	0.0135
ACC	(0.000)	(0.051)			(0.000)	(0.051)
SIZE	-0.0138^*	-0.0678	-0.0129^*	-0.0793	-0.01338^**	-0.0757
SIZE	(0.007)	(0.103)	(0.007)	(0.111)	(0.007)	(0.095)
LEV	0.0036^***	0.1099	0.0041^***	-0.0880	0.0036^***	0.1065
LEV	(0.001)	(0.373)	(0.001)	(0.365)	(0.001)	(0.367)
MB	-0.0001	-0.0316^**	-0.0000	-0.0318^**	-0.0000	-0.0314^**
MB	(0.001)	(0.015)	(0.001)	(0.015)	(0.001)	(0.015)
BETA	0.0064^**	0.0019	0.0064^**	0.0031	0.0064^**	0.0003
BETA	(0.003)	(0.045)	(0.003)	(0.045)	(0.003)	(0.045)
GROWTH	-0.0002	0.0278^***	-0.0002	0.0277^***	-0.0002	0.0268^***
GROWTH	(0.000)	(0.009)	(0.000)	(0.009)	(0.000)	(0.010)
COVID	-0.0351^***	-0.0019	-0.0358^***	0.0098	-0.0349^***	-0.0037
COVID	(0.006)	(0.085)	(0.006)	(0.085)	(0.006)	(0.856)
ADR	-0.0098	-0.2141^*	-0.0087	-0.1728	-0.0094	-0.2260^*
ADR	(0.021)	(0.123)	(0.020)	(0.133)	(0.021)	(0.125)
Constant	0.3785^**	0.7212	0.3621^**	1.1716	0.3964^***	0.1611
Constant	(0.182)	(2.253)	(0.181)	(2.384)	(0.147)	(2,128)
Observations	1,347	434	1,347	434	1,347	434
R²	0.037	0.057	0.036	0.050	0.037	0.056
Adjusted R²	0.029	0.032	0.029	0.030	0.031	0.036
Fixed Effect	Firm	Firm	Firm	Firm	Firm	Firm

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