Discretionary Accruals Quality, Cost of Capital, and Diversification

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.