Cost of equity and earnings transparency in the Brazilian capital market

Abstract

This research paper investigates the relationship between the Cost of Equity and the Earnings Transparency in the Brazilian capital market. For this purpose, supported by a literature review, especially based on Barth et al. (2013), data were analyzed from 246 companies between 2005 and 2014. The data analysis was performed using descriptive statistics, correlations and regressions. Initially regressions were estimated with fixed effects panel data and by the observation of high standard deviations of the variables and the possibility presence of heteroscedasticity, estimates were made by quantile regressions and GLS to control these phenomena. In the results, it can be seen that Earnings variables of the companies had high standard deviations in the analyzed period, influencing the analysis for fixed effects. From the models by quantile regressions in median and GLS it was possible to see that, despite the segregation of companies for portfolios based on their size, it did not present influence in the analysis, and the ratio of Expected Cost of Equity with Earnings Transparency was negative and significant. It is concluded that in the period analyzed the higher the Earnings Transparency, the lower the Cost of Equity of companies. Therefore, the identification of the most suitable models to heteroskedastic earnings analysis in the Brazilian market, as well as their evidence of reduced Cost of Equity by increasing the Earnings Transparency, stand out as major contributions of this study.

Keywords: Cost of Equity, Earnings Transparency, quantile regression.