How does the Information Risk affect the Cost of Capital?: Evidence from Korea

This paper empirically investigates the evidence documenting a positive association between residual accruals volatility as a proxy for information risk and a firm’s cost of capital. Also it examines whether information risk with innate accruals quality has a greater effect on the cost of capital than information risk with discretionary accruals quality. The empirical results provide the following evidence. First, it is shown that the information risk has a positive effect on the cost of debt significantly while it has a positive effect on the cost of equity but this effect does not have significant meaning. Second, consistent with the result of information risk effect on cost of debt, it find that firms with information risk related to innate accruals quality effect on the cost of debt and equity have positively more high than firms with information risk related to discretionary accruals quality based on F-test.