ACCO 340 Lecture Notes - Lecture 7: Capital Structure
2 Feb 2017
School
Department
Course
Professor
Document Summary
Beta: the riskier these future returns are, the lower investors" reactions to a given amount of unexpected earnings will be. If the future expected returns are riskier, the lower it will be its value to a risk-averse investor. Capital structure: erc of a firm will be lower since most earnings go to debt holders. Earnings quality (informativeness): erc will be higher the more the good or bad news in current earnings is expected to persist into the future, since current earnings then provide a better indication of future firm performance. For example if the gn is due to successful. **ercs are higher the higher the persistence of unexpected current earnings changes* **exceptions: companies can write-off r&d costs, which can produce bn in current earnings. However, to the extent the market perceives the research as having future value, it would react positively to this bn (negative persistence). This is possible if there is enough disclosure.
