Abstract

In this study the relationships between cost of capital and six dimensions of earning quality are evaluated. Furthermore, we provide a conceptual model based on these relationships. Six dimensions of earning quality based on accounting information include, “Accrual quality ", " Earning variability", "Optional accrual items", "Common factor", "Earning predictability" and "Earning smoothness". Findings of this paper show that, common factor has no effect on cost of capital. Furthermore, optional accrual items have unexpected relation with cost of capital. Among other factors, "Earning quality" and “Accrual quality " had the highest impact on cost of capital. Finally, a conceptual model is presented using structural equations such that, only two indices of quality of accrual items and earning smoothness and two indices of operating environment (size and return of assets) are presented in the final model.

Key words: Earning quality, cost of capital, conceptual model; accrual quality; smoothness.