THE RELATIONSHIP BETWEEN COST OF EQUITY AND RISK IN EARNING COMPONENTS (ACCRUALS AND CASH FLOWS) IN TEHRAN STOCK EXCHANGE FIRMS

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KARBASI YAZDI HOSSEIN; NEAMI ABDOLLAH; MIRAGHAEE JAFARI MAHTAB SADAT

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Journal: JOURNAL OF ECONOMICS & BUSINESS RESEARCH Year:2010 | Volume:1 | Issue:1 Page(s): 89-97

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Information Journal Paper

Title

THE RELATIONSHIP BETWEEN COST OF EQUITY AND RISK IN EARNING COMPONENTS (ACCRUALS AND CASH FLOWS) IN TEHRAN STOCK EXCHANGE FIRMS

Author(s)

KARBASI YAZDI HOSSEIN | NEAMI ABDOLLAH | MIRAGHAEE JAFARI MAHTAB SADAT | Issue Writer Certificate

Keywords

COST OF EQUITYQ3

RISK IN EARNINGQ3

RISK IN ACCRUALSQ3

RISK IN CASH FLOWSQ3

OJ MODELQ3

Abstract

risk in total earning is a determinant for estimating the COST OF EQUITY, but when firm’s earnings are smoothed, aggregate earnings can conceal the risk of operations. In such a case, it seems that the components of earning such as accruals and operating cash flows play an important role in risk measurement and COST OF EQUITY estimation. The purpose of this study is to investigate the relationship between the COST OF EQUITY and the RISK IN EARNING components and also a better estimation of the COST OF EQUITY. There are 59 sample firms and the research method is correlation. For testing the three hypotheses, the researchers used regression analysis and Pearsonian correlation, and Tpaired method for testing the fourth hypothesis. The research results show that there is a weak and reverse correlation between the COST OF EQUITY and total earning risk and also between the COST OF EQUITY and the risk in operating cash flows and the RISK IN ACCRUALS. Other results show that estimation of the COST OF EQUITY is based on RISK IN EARNING components in comparison with total earning risk causes a better evaluation.

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