|
Operating Risk, Information Risk, and Cost of Capital
Michelle Liu, Penn State
Peter Wysocki, Massachusetts Institute of Technology
ABSTRACT. This paper re-examines prior empirical evidence documenting a positive association between residual accruals volatility (a proxy for information risk) and a firm’s cost of capital. We show that previous empirical findings are not robust and are likely driven by operating risk rather than information risk. Our empirical results show that, after controlling for cash flow volatility and stock return volatility, residual accruals volatility is not associated with a firm’s equity beta, earnings-to-price ratio, or its cost of debt. In addition, we show that over 96% of the variation in the residual accruals volatility "asset-pricing factor" is explained by volatility factors based on firms' cash flows and stock returns. These findings suggest that residual accruals volatility is not related to cost of capital in the ways previously described in the literature.
Full-Text is no longer available online. Please contact the author(s) for more information about this manuscript.
Back to Session Listing
|