Analyzing the Incremental Information Content of Earnings Downside Risk in Explaining the Cost of Capital

    The purpose of this study is to investigate the effect of a new measure of risk, the earnings downside risk on capital costs, and comparing the incremental information content of this measure to other risk metrics. accordingly, two hypotheses were defined and the effect of the earnings downside risk on the cost of capital as well as the information content of this measure in relation to the risk measures of earnings attributes (as a criterion of the company's fundamental risk), earnings beta, earnings volatility, returns downside risk and negative skewness of stock returns and Fama-French Factor Betas was investigated. To calculate the variables, the data of 91 companies listed in Tehran Stock Exchange for the period of 2000 to 2016 were analyzed. In order to test the hypotheses, portfolio analysis and Fama-Macbeth regression model were used. The results show that the earnings downside risk has a positive effect on capital cost and has higher informational content than other risk measures.