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The Relationship between Earnings Quality and Cost of Capital in the Light of Agency Theory: A Case Study of Jordan

Abstract

The study aimed to provide evidence derived from the reality of the
Jordanian environment about the earnings quality and the cost of capital using
Asymmetric Information Model, and how is this relationship affected by some
variables that are related to agency theory such as: the administrative equity ratio
and the degree of unsystematic risk.
The population of the study consisted of all public shareholding companies
of the industrial, service and real estate sectors. A sample of 102 companies were
selected, and using the data of this sample during (2008 – 2012) the variables of
the study were calculated where the researcher utilized Jones scale (1991)
developed by Dechow et al., 1995 in measuring earnings quality and the model
relative effectiveness of the price in the scale of Asymmetric Information Model.
But for the dependent variable represented in the cost of the capital, the
researcher used capital costing model.
The results of the study supported the hypothesis of the reverse impact of
earnings quality weighted by asymmetric information in the cost of the capital.
The results have shown an improvement in the interpretative value of the model
when entering the auditing variable represented by the administrative equity
ratio or the degree of unsystematic risk, also of the controversial results of the study the emergence of an impact of equity of debt in the cost of the capital. The scientific value characterizing this study represented in the selection of two auditing variables that has been selected before and the emergence of an impact of equity of debt in the cost of the capital.