Table 2 Variable definitions and measurements
Variable definition | Variable measurement |
|---|---|
Dependent variable | |
Cost of equity | Weighted average cost or equity capital based on the CAPM. It is calculated by multiplying the equity risk premium of the market with the beta of the firm’s stock, plus an inflation-adjusted risk-free rate. Hence, the equity risk premium is the expected market return minus the inflation-adjusted risk-free rate |
Independent variable | |
Firm performance | Return on assets (measured as: earnings before interest, taxes, depreciation, and amortization divided by total assets [43] |
Moderator variable | |
Risk disclosure quality | The principal component score of the highest eigenvalue computed from the factorial analysis of the principal components of the four quality dimensions |
Quantity | Ln (total number of risk disclosure sentences) |
Coverage | (1/ Herfindahl index) / the number of main risk categories |
Depth qualitative | Ln (total number of qualitative risk disclosure sentences that have a predicted effect on the future cash flows of the firm) |
Depth quantitative | Ln (total number of quantitative risk disclosure sentences that have a predicted effect on the future cash flows of the firm) |
Outlook | Ln (total number of sentences include information about policies taken or planned strategies by the management to face the firm’s specified risk) |
Control variables | |
Size | |
Leverage | Long-term debt divided by the market value of common equity at the end of the year [56, 84] |
Earnings quality | We used two measures to proxy firms’ earnings quality. First, the cross-sectional approach of the modified Jones model by [25], following Teoh et al. [88] steps to calculate current accruals quality. Second, the standard deviation of the firm’s earnings over 2017–2019 (Francis et al., 2008). Then, a principal component score with the highest eigenvalue calculated from two measures for earnings quality (firm’s accruals quality and rolling standard deviation of its earnings over the period from 2017–2019). Then, to adjust higher scores to represent higher earnings quality, the absolute values of the principal component scores are multiplied by (-1) |
Liquidity | Quick ratio ((Total current assets – inventory) / Total current liabilities) |