Impact of Corporate Earnings on the Cost of Equity: An Empirical Study of Pakistani Textile Sector
European Business & Management
Volume 2, Issue 2, November 2016, Pages: 54-59
Received: Aug. 31, 2016; Accepted: Nov. 24, 2016; Published: Dec. 30, 2016
Views 2017      Downloads 65
Authors
Muhammad Ateeq ur Rehman, Lahore Business School, the University of Lahore, Lahore, Pakistan
Awais Raoof, Lahore Business School, the University of Lahore, Lahore, Pakistan
Syed Zulfiqar Ali Shah, Department of Management Sciences, International Islamic University, Islamabad, Pakistan
Ramiz ur Rehman, Lahore Business School, the University of Lahore, Lahore, Pakistan
Sajjad Ahmed, School of Business & Management Sciences, Minhaj University Lahore, Lahore, Pakistan
Article Tools
Follow on us
Abstract
The main purpose of this study is to investigate the relation between corporate earnings and cost of equity capital. Panel regression model is used to investigate the relation while Hausman test is applied to check the fixed and random effect. The study finds negative but weak relation between earnings and cost of equity capital. The study examines more intensity of fixed effect as compare to random effect.
Keywords
Cost of Equity, Corporate Performance, EPS, Market Risk
To cite this article
Muhammad Ateeq ur Rehman, Awais Raoof, Syed Zulfiqar Ali Shah, Ramiz ur Rehman, Sajjad Ahmed, Impact of Corporate Earnings on the Cost of Equity: An Empirical Study of Pakistani Textile Sector, European Business & Management. Vol. 2, No. 2, 2016, pp. 54-59. doi: 10.11648/j.ebm.20160202.16
Copyright
Copyright © 2016 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
References
[1]
Meigs, R. F., Meigs, M. A., Bettner, M. and Whittington, R. (1996), Accounting: The basis for business decision, (10th ed), pp. 5-28. The McGraw-Hill Companies. Inc. NY.
[2]
Brealey, R. A., Myers, S. C. and Allen, F. (2006) Principles of Corporate Finance, (8th ed) pp. 5-11, McGraw Hill, OH.
[3]
Lougee, B. and Wallace, J. (2008), Corporate Social Responsibility (CSR) Trend, Journal of Applied Corporate Finance, Vol. 20 No 1, pp. 96-108.
[4]
Seppa, R. (2008), Capital structure decisions: research in Estonian non-financial companies, Baltic Journal of Management, Vol. 3 No. 1, pp. 55-70.
[5]
Lang, M. H. (2008), Discussion of "Analyst Coverage and the Cost of Raising Equity Capital: Evidence from Underpricing of Seasoned Equity Offerings", Contemporary Accounting Research Vol. 25 No. 3, pp. 701–6.
[6]
Estallo, M. D. A. G., Fuente, F. G. D. and Gríful-Miquela, G. (2007), The Importance of Corporate Social Responsibility and Its Limits, Int Adv Econ Res, Vol. 13, pp. 379–388.
[7]
Bhattacharya, U. (2006), Enforcement and its Impact on Cost of Equity and Liquidity of the Market, Available at: SSRN: http://ssrn.com/abstract=952698.
[8]
Richardson, A. J. and Welker, M. (2001), Social disclosure, financial disclosure and the cost of equity capital Accounting, Organizations and Society, Vol. 26, pp. 597–616.
[9]
Lakhal, F. (2009), Does corporate disclosure policy change financial analysts’ behaviour? Evidence from France, Journal of Accounting & Organizational Change, Vol. 5 No. 3, pp. 344-361.
[10]
Rappaport, A. (2006) Ten Ways to Create Shareholder Value, Harvard Business Review, september 2006, pp 1-13.
[11]
Poshakwalea, S. and Courtisb, J. K., (2005), Disclosure Level and Cost of Equity Capital: Evidence from the Banking Industry, Managerial and Decision Economics, Vol. 26, pp. 431–444.
[12]
Nichols, D. C. and Wahlen, J. M. (2004) How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence, Accounting Horizons,Vol. 18, No. 4,pp. 263–286.
[13]
Daves, P. R., Ehrhardt, M. C. and Kunkel, R. A. (2000), Estimating Systematic Risk: The Choice Of Return Interval And Estimation Period, Journal of Financial and Strategic Decisions, Vol. 13 No 1, pp. 7-13.
[14]
Burgstahler, D. C. and Dichev, I. D. (1997), Earnings, Adaptation and Equity Value, The Accounting Review, Vol. 72 No. 2, pp. 187-215.
[15]
Moore, G. (2001), Corporate Social and Financial Performance: An Investigation in the U.K. Supermarket Industry, Journal of Business Ethics, Vol. 34, No. 3, pp. 299-315.
[16]
Kryzanowski, L. and Rahman, A. H. (2009), Degrees-of-freedom problem and implied cost of equity capital, Finance Research Letters 6, pp171–178.
[17]
Bercel, A. (1994), Consensus Expectations and International Equity Returns, Financial Anaiysts Journal, Vol. 50 No. 4, pp.76-80.
[18]
Herbst, A. F. and Wu, J. S. K. (2004), Trajectory of Earnings Growth Influences Cost of Equity Capital, and Optimal Time to Sell, Investment Management and Financial Innovations, Vol 1, pp. 100-113.
[19]
Mikhail, M. B., Walther, B. R. and Willis, R. H. (2004), Earnings Surprises and the Cost of Equity Capital, Available at SSRN: http://ssrn.com/abstract=504662
[20]
Zhu, F. (2009), Does better corporate governance always lead to lower cost of equity capital? Evidence from an international study, accessed from: www.google.com
[21]
Rahman, A. (2007), The Degree-of-Freedom Problem and Implied Cost of Equity Capital, www.ssrn.com/abstract=1009247.
[22]
Dedman, E., Lin, S. W. J., Prakash, A. j. and Chang, C. H. (2008), Voluntary disclosure and its impact on share prices: Evidence from the UK biotechnology sector, Journal of Accounting and Public Policy, Vol. 27, pp.195–216.
[23]
Core, J. E., Guay, W. R. and Kothari, S. P. (2002), The Economic Dilution of Employee Stock Options: Diluted EPS for Valuation and Financial Reporting, The Accounting Review, Vol. 77 No. 3, pp. 627-652.
[24]
Oha, K., Kimb, K and Kimc, H. (2006), An empirical study of the relation between stock price and EPS in panel data: Korea case, Applied Economics, Vol. 38, 2361–2369.
[25]
Botosan, C. A and Plumlee, M. A. (2002), A Re-Examination of Disclosure Level and the Expected Cost of Equity Capital, Journal of Accounting Research, Vol. 40 No. 1, pp. 21-40.
[26]
Tan, H. P., Plowman, D. and Hancock, P. (2007), Intellectual capital and financial returns of companies, Journal of Intellectual Capital, Vol. 8 No. 1, pp. 76-95.
[27]
Faulkender, M., Milbourn, T. and Thakor, A. (2006), Does Corporate Performance Determine Capital Structure and Dividend Policy?, presented in seminar at Washington University, NY.
[28]
Bushee, B. J and Noe, C. F. (2000), Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility, Journal of Accounting Research, Vol. 38, Supplement, pp. 171-202.
[29]
Shyu, S., Jeng, Y., Ton, W. H., Lee, K. and Chuang, H. M. (2006), Taiwan multi-factor model construction: equity market neutral strategies application, Managerial Finance, Vol. 32 No. 11, pp. 915-947.
[30]
Guo, W., Shiah-Hou, S. and Yang, Y., (2006), Stock bonus compensation and firm performance in Taiwan, Managerial Finance, Vol. 32 No. 11, pp. 862-885.
[31]
Tapon, F. (1983), CAPM as a Strategic Planning Tool, Managerial and Decision Economics, Corporate Strategy, Vol. 4 No. 3, pp. 181-184.
[32]
Almisher, M. A. and Kish, R. J. (2000), Accounting betas – an ex anti proxy for risk within the ipo market, Journal of Financial and Strategic Decisions, Vol. 13 No. 3, pp.23-34.
[33]
Bellalah, M. and Ellouz, S. (2007), Asset pricing and predictability of stock returns in the french market, Presented at international conference IFC4 (Mars 2007). Accessed from: mpra.ub.uni-muenchen.de/4961.
[34]
Siddiqui, A. (2008), Financial contracts, risk and performance of Islamic banking, Managerial Finance, Vol. 34 No. 10, pp. 680-694.
[35]
Pham, P. K., Suchard, J. and Zein, J. (2007), Corporate Governance, Cost of Capital and Performance: Evidence from Australian Firms, http://ssrn.com/abstract=1015986
[36]
Snijders, T. A. B. (2005), ‘Fixed and Random Effects’, Encyclopedia of Statistics in Behavioral Science. Vol. 2, 664-665.
ADDRESS
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
U.S.A.
Tel: (001)347-983-5186