The Relation Between Earnings Quality and Cost of Equity and the Role of Ownership Concentration: Evidence from Italy

Claudia Frisenna, Daniele Greco and Davide Rizzotti
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Claudia Frisenna: Department of Economics and Business, University of Catania, Corso Italia 55, Catania 95127, Italy
Daniele Greco: Department of Economics and Business, University of Catania, Corso Italia 55, Catania 95127, Italy
Davide Rizzotti: Department of Economics and Business, University of Catania, Corso Italia 55, Catania 95127, Italy

The International Journal of Accounting (TIJA), 2021, vol. 56, issue 03, 1-20

Abstract: This study aims to replicate the analysis of the relationship between earnings quality and cost of equity in the Italian context, a context characterized by high ownership concentration and weak investor protection dominated by the type II agency problem. We hypothesize a different intensity of the earnings quality–cost of equity relation between concentrated-held firms and dispersed-held ones. The analysis is based on a sample of 774 firm-year observations from 128 Italian nonfinancial listed firms, from 2011 to 2017. Empirical results confirm the existence of a negative relationship between earnings quality and cost of equity. Moreover, findings show that in Italy, this relation is stronger for firms with concentrated ownership and weaker for firms with more dispersed ownership. Consistent with our hypothesis, this finding suggests that ownership structure affects the sensitivity of the earnings quality–cost of equity relationship.

Keywords: Earnings quality; cost of equity; ownership concentration; Type II agency problem; Italy (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S1094406021500104

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