Does Information Risk Really Matter? An Analysis of the Determinants and Economic Consequences of Financial Reporting Quality

Abstract

Controlling for firm-specific characteristics determining financial reporting quality, this paper finds evidence of a negative association between firms' total risk and financial reporting quality. While the results imply that firms providing financial information of higher quality do not necessarily enjoy a lower cost of equity capital, a significant negative relation is documented between reporting quality and idiosyncratic risk. This suggests that the quality of accounting information is not an additional systematic priced risk factor as suggested in recent studies. The evidence reported demonstrates the importance of explicitly controlling for the determinants of financial reporting quality when investigating the associated economic consequences.

Keywords: financial reporting quality, information risk, cost of capital, idiosyncratic risk

JEL Classification: D80, G12, G14, M41, M43