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The winning paper, “Earnings Transparency and Cost of Capital,” recently published in the Journal of Accounting and Economics, was coauthored with Mary E. Barth (Stanford) and Wayne R. Landsman (University of North Carolina). The trio received the Best Paper Award on August 4, 2014, at the American Accounting Association’s Annual Meeting, Financial Accounting and Reporting Section, held in Atlanta, GA.
The annual award honors the paper that best reflects the tradition of academic scholarship in financial accounting and explores research that is relevant to problems facing the accounting profession and standard-setters.
The paper makes a case for more transparent accounting information from Corporate America by providing evidence that corporations with more transparent earnings enjoy higher stock valuations through a reduction in their cost of capital. A firm’s valuation is often determined by discounting future cash flows by the firm’s cost of capital, Konchitchki explains. The study finds that the cost of capital is negatively related to transparency. In other words, when there is less earnings transparency, the risk to investors is higher, resulting in higher cost of capital. Likewise, if there is more earnings transparency, one has access to more information about a company’s value by observing its earnings, resulting in lower risk and, in turn, lower cost of capital. Ultimately, lower cost of capital equates to higher firm value.
The research has the potential to change how capital market participants consider the quality of accounting data from corporate financial statements because the findings illuminate the importance of transparent corporate accounting for stock valuation, Konchitchki says.
Konchitchki, who joined the Berkeley-Haas faculty in 2011, is the Schwabacher Fellow, Hellman Fellow, and Bakar Faculty Fellow for Distinguished Excellence in Research. Konchitchki specializes in interdisciplinary capital markets research, focusing on the usefulness of accounting information through its links to macroeconomics (e.g., inflation; GDP) and valuation (e.g., financial statement analysis; cost of capital; asset pricing). His research has helped develop a relatively new interdisciplinary area of Macro-Accounting by serving as a starting point for a new line of work on the informational role of the links between financial reporting, valuation, and the macroeconomy. He provides a comprehensive analysis of both macro-accounting “directions”: macro-to-micro (e.g., how overall price-level changes in the economy inform accounting results of individual corporations), and micro-to-macro (e.g., how accounting results of individual corporations inform overall macroeconomic activity).
Konchitchki teaches the core MBA Financial Accounting class and the PhD Financial Accounting Research class. He was recently selected by Poets & Quants as one of the “World’s Top 40 Under 40” business school professors and by his MBA students as the winner of the Haas School’s Earl F. Cheit Award for Excellence in Teaching. For three straight years he won membership in Club Six for teaching excellence.