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http://dx.doi.org/10.5762/KAIS.2019.20.6.483

The Matching Principle, Discretionary Accrual and Cost of Capital  

Lee, Kyu-Jin (Division of Accounting, Hanyang University)
Publication Information
Journal of the Korea Academia-Industrial cooperation Society / v.20, no.6, 2019 , pp. 483-488 More about this Journal
Abstract
This study first examines whether the high matching principle reduces the cost of equity, and then examines the effect on discretionary accruals and capital cost. According to previous studies, the higher the response to revenue cost, the higher the earnings quality. The higher the quality of earnings, the lower the information risk, and the lower the information risk, the lower the capital cost of enterprise. Discretionary accruals can play two roles in opposing each other. One is that managers use the discretionary accruals to provide private information about the future of the corporation to the market, thus enhancing the usefulness of the earnings. The other is that managers can use the discretionary accruals opportunistically to distort earnings and provide misinformed information to investors, thus reducing the usefulness of earnings. The results of this study represents that the higher the responding to the revenue cost, the less the cost of equity. In the case of firms with high revenue response, we examine whether discretionary accruals reduce the cost of equity capital. As a result of the study, the higher the responding to the revenue cost, the lower the cost of equity capital. Companies with higher matching principle have been shown to reduce their capital costs by using discretionary accruals.
Keywords
Matching Principle; Discretionary Accrual; Cost of Capital; Earnings Quality; Information Risk;
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