Asymmetric Market Risk, Accounting Quality and the Cost of Capital: Evidence from Taiwan Capital Market

Abstract Financing decisions have always been regarded as important to company operations. The capital structure of a company has always been an important issue of financial research. This research mainly attempts to answer the previous literature on the inconsistency of the relationship between accounting quality and cost of capital. This study examines the ways in which accounting quality can affect the cost of capital through asymmetric market risk. In order to study the issue, a regression model is used. The dataset consisting of companies listed on the Taiwan Stock Exchange includes 317 companies as a sample, providing a total of 7,731 company-year observations. The findings reveal that the cost of capital has a positive correlation with asymmetric market risk, and that asymmetric market risk is found to have a corresponding positive association with accounting quality. The results provide support for the general view that asymmetric market risk would appear to be a more appropriate measure than symmetric market risk when linking accounting quality to the cost of capital. JEL classification numbers: C32, D84. Keywords: Excess risk premium, Financial statement, Downside risk, CAPM.