Expected Earnings Growth and the Cost of Capital: An Analysis of Accounting Regime Change in the European Financial Market

33 Pages Posted: 15 Jun 2006

See all articles by Christina Dargenidou

Christina Dargenidou

National Bank of Greece

Stuart McLeay

University of Sussex; The University of Sydney

Ivana Raonic

City University London - The Business School

Date Written: April 2006

Abstract

This study focuses on the relation between the cost of equity capital and earnings expectations when the properties of accounting that determine earnings vary across different regulatory regimes. More particularly, it addresses the European setting where different types of GAAP regime have continued to function in the presence of the gradual harmonization of the underlying legal framework, and where the adoption of internationally recognised accounting standards by certain firms has anticipated the requirement for International Financial Reporting Standards. On the basis of estimates of the cost of equity that are implied by analysts' earnings forecasts, the paper provides evidence that financial market integration may have already contributed to mitigating the economic consequences of accounting diversity, and that switching to IFRS could have a short lived impact on capital markets. Moreover, based on firm level transparency and disclosure rankings provided by Standard and Poor's, it is shown how the quality of financial reporting conditions the implied cost of equity under different GAAP.

Keywords: Abnormal earnings growth, Analysts' forecasts, Cost of capital, Harmonization, International financial reporting standards, Transparency and disclosure

JEL Classification: M41

Suggested Citation

Dargenidou, Christina and McLeay, Stuart and Raonic, Ivana, Expected Earnings Growth and the Cost of Capital: An Analysis of Accounting Regime Change in the European Financial Market (April 2006). Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=907059 or http://dx.doi.org/10.2139/ssrn.907059

Christina Dargenidou (Contact Author)

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
Greece

Stuart McLeay

University of Sussex ( email )

Falmer, Brighton BN1 9SL
United Kingdom

The University of Sydney ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Ivana Raonic

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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