Is Accounting Information Quality Priced in the Korean Markets?

There has been a debate as to whether accounting information quality is priced on asset re-turns and systematically affects the cost of capital of firms in the world market. In this paper, we examine whether there is a relationship between accounting information quality proxied by accruals quality in the Korean markets and stock returns, and whether it does affect the cost of capital. Although accruals quality is linked with some variables representing the uncertainty of future cash flows and thus it could be a good proxy for a risk, we find no evidence, unlike in the U.S., that this risk is systematically priced in stock returns and it does affect the cost of capital in Korea. Specifically, after controlling for the factors affecting the cost of debt and the cost of equity, we find that the proxy variable for accounting information quality has no significant relation with the cost of debt and the cost of equity. In particular, there is a flat relation between average stock returns and accruals quality. We also provide another perspective in examining whether accounting information quality affects the cost of equity capital. If account-ing information quality affects the cost of equity, as accounting information quality becomes poorer, investors would require a greater risk premium associated with the well-known risk factor such as firm size, book-to-market, and price momentum. However, we find no evidence supporting this.