Effect of Accrual Quality on the Cost of Common Stock

This paper examines the relation between accruals quality and the cost of common stock. Cost of common stock as part of a company’s cost of capital is common stockholders’ expected return. As common stockholders take investment risk, they expect an appropriate return. Information risk, besides investment risk, may affect cost of capital. Accruals quality, as one of the most important indicators of information risk, has a major role on determination of cost of common stocks. Review of the relation between accruals quality as well as its discretionary and nondiscretionary components and cost of common stocks, using information of 107 listed companies over the years 2000 to 2008, indicates a significant relation between accruals quality and cost of common stocks. There is a stronger relation between a nondiscretionary component of accruals and cost of common stocks than that between a discretionary component and cost of common stocks.