Alarge amount of literature have examined on cost of capital and earningtransparency, effects of earning transpareny on cost of capital common stock, earningstransparency and its relevancy for the cost of debt and cost of equity, Stakeholders, Transparency and Capital Structure, The Effect of Earnings Aggressiveness, Income Smoothing, EarningsTransparency on Cost ofEquity withEarnings Informativeness, ( Mary E.Barth, YanivKonchitchki , WayneR.Landsman, 2013, Farkhondeh Beigi,*, Mohsen Hosseini, SiavashQodsi 2015, Eduardo Flores, JoelsonOliveira Sampaio, 2017, Andres Almazan, Javier Suarez, Sheridan Titman? 2003, HerrySunarto, Etty Murwaningsari, Sekar Mayangsari, 2016) outof Pakistan. while in Pakistan very few studies conducted on Costof Capital – The Effect to the Firm Value and Profitability, MEASUREMENT OF COST OF CAPITAL FOR FOREIGNDIRECT INVESTMENT IN PAKISTAN:;) (Muhammad Shadab AbdulSattar 2015, ZAHIR SHAH, 2003).
Thereis no any study conducted on “effect of earning transparency on cost of capitalcommon stock” Pakistani perspective. Earning Transparency of the companies in recentyears has become increasingly important, and nowadaysfinancial reporting transparency is one ofthe most important financial issues , Francis et al. (2005) stated that the lack of Earning Transparency reported createsthe information risk, as a result, investors will demand a higher risk premium,and consequently, the cost of capital common stock increases, and vice versa,with increasing more clear and unambiguous earnings reported and, the shareholderconfidence will increase, and the expected rate ofreturn for shareholders and consequently the costof capital common stock will reduce. Thus, by reducing the quality ofaccounting information and earning, information risk of the company increases,and it increases the expected return to shareholders, and thus, the capitalcost will rise.Earnings quality can have consequences, suchas increasing the efficiency of investment, the ability to predict futurereturns. Investors want to earn more earning, and reduce the risk of theirinvestments.
For this reason they are attempting to form portfolios, so theyreduce risk by diversifying investments, or obtain maximum efficiency for a certainlevel of risk. The optimal portfolio selection needs assessment of both riskpremium and portfolios return factors. Over the years, various models have beenproposed to assess risk premium and portfolio return. Thedifferent models have been evaluated, and theresults indicate that the factors considered in these models alone can’t explain the relationshipbetween risk premium and portfolio return. For this reason, the idea ofcombining these factors came together. For this reason, the idea of combiningthese factors was proposed.
Therefore, in this study, the relationship betweenearnings transparency and cost of capital common stock will be investigate byFama and French model and taking into account the momentum factor of the firmslisted in the Pakistan Stock Exchange.Therefore, the main question of the researchis as follows:Will earning transparency, momentum and Famaand French model variables affect the cost of capital common stock ?