Accounting-based downside risk, cost of capital, and the macroeconomy

Yaniv KONCHITCHKI, Yan LUO, Mary L. Z. MA, Feng WU

Research output: Journal PublicationsJournal Article (refereed)

7 Citations (Scopus)

Abstract

We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we find that, relative to low earnings downside risk firms, high earnings downside risk firms experience more negative operating performance over the subsequent period, are more sensitive to downward macroeconomic states, and are more strongly linked to earnings attributes and other risk-related measures from prior research. In line with our prediction, we also find that earnings downside risk explains variation in firms’ cost of capital, and that this link between earnings downside risk and cost of capital is incremental to several earnings attributes, accounting and risk factor betas, return downside risk, default risk, earnings volatility, and firm fundamentals. Overall, this study contributes to accounting research by demonstrating the key valuation and risk assessment roles of earnings downside risk derived from firms’ financial statements, also shedding new light on the link between accounting and the macroeconomy.
Original languageEnglish
Pages (from-to)1-36
Number of pages36
JournalReview of Accounting Studies
Volume21
Issue number1
Early online date29 Aug 2015
DOIs
Publication statusPublished - Mar 2016
Externally publishedYes

Fingerprint

Cost of capital
Downside risk
Macroeconomy
Operating performance
Prediction
Risk factors
Firm risk
Accounting research
Earnings volatility
Default risk
Financial statements
Macroeconomics
Incremental
Risk assessment
Risk measures
Cross section

Keywords

  • Accounting performance
  • Earnings downside risk
  • Cost of capital
  • Financial statement analysis
  • Macroeconomy

Cite this

KONCHITCHKI, Yaniv ; LUO, Yan ; MA, Mary L. Z. ; WU, Feng. / Accounting-based downside risk, cost of capital, and the macroeconomy. In: Review of Accounting Studies. 2016 ; Vol. 21, No. 1. pp. 1-36.
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Accounting-based downside risk, cost of capital, and the macroeconomy. / KONCHITCHKI, Yaniv; LUO, Yan; MA, Mary L. Z.; WU, Feng.

In: Review of Accounting Studies, Vol. 21, No. 1, 03.2016, p. 1-36.

Research output: Journal PublicationsJournal Article (refereed)

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