Discretionary accruals quality, cost of capital, and diversification

Urcan, O, Demirkan, S and Radhakrishnan, S (2012) Discretionary accruals quality, cost of capital, and diversification. Journal of Accounting, Auditing and Finance, 27 (4). pp. 496-526. ISSN 0148-558X

Abstract

This study examines the discretionary accruals quality of single- and multiple-segment firms. The authors hypothesize and find that the discretionary accruals quality is lower for multiple-segment firms than single-segment firms, and for the same level of discretionary accruals quality, the cost of capital is higher for multiple-segment firms than single-segment firms. These findings suggest that more severe agency problems in multiple-segment firms compared with single-segment firms may lead to poor discretionary accruals quality and agency risk is priced-in as a higher cost of capital.