Accounting Information, the Cost of Capital, and Stock Prices: Evidence from Panel Dynamics

The goal of this paper is to address the value relevance of accounting information, relating to certain fundamental income statement variables for the cost of capital, and consequently, for the market value of industrial firms. The basic methodology follows is related to the panel data analysis as well as to the linear association first, between the accounting information variables and the cost of capital and, next, between the cost of capital and the book value of the firms. Data from the US industrial sector was obtained over the period 1980-2008. The extreme importance of accounting variables seems to provide information relevant to the firm in order to approximate the present value of expected future earnings. The empirical findings show a mixed performance with respect to the accounting information variables used.  Moreover, the results have substantial implications for the valuation of the firms during period of financial crises.