Effects of Representational Faithfulness and Feedback Value on Cost of Equity

ABSTRACT: It is contended among the accounting researchers that information asymmetry could be reduced through disclosure of information in respect to quality of earnings. The main purpose of this paper is to review the effects of earnings attributes (feedback value and representational faithfulness) on the cost of equity. Review of the contemporary literature depicts that managers should disclose more quality information particularly related to feedback value and representational faithfulness in order to decrease the information asymmetry and as a result diminish the cost of equity. Cultivating from the discussion in contemporary literature, this paper proposes a framework that links associations between feedback value and representational faithfulness with cost of equity.