The Impact of Quality of Accounting Information on Cost of Capital: Insight from an Emerging Economy

Abstract

The aim of this study is to determine the impact of the quality of accounting information on the cost of capital in the firms listed on the Pakistan Stock Exchange (PSX). The study focuses on the fundamental qualitative attributes of accounting information mentioned in the Statement of Financial Accounting Concepts (SFAC) No. 8. These attributes comprise predictive value, neutrality, completeness and free from error. The cost of capital is measured using the discounted cash flow technique. Very few studies have been conducted using the discounted cash flow technique in relation to emerging stock markets, as compared to developed stock markets. Data were collected from the companies belonging to the non-financial sector of the PSX from 2001 to 2019. The regression analysis results showed that the attributes of accounting information—predictive value, neutrality, completeness and free from error—impact the cost of capital in the PSX. A systematic pattern analysis of risk-adjusted portfolio returns also revealed that these qualitative attributes are genuine risk factors and are not created by chance due to the inefficiency of the market. A policy implication of this finding is that potential investors should consider the qualitative attributes of accounting information before making their investment decisions.