A The Role of Accounting Information in Risk Explanation

This paper analyses the risk-relevance of several accounting fundamentals in two industries - Manufacture of other non metallic mineral products and Motor vehicles- to identifying the surrogate of systematic risk (β). Considering the cost of equity capital is one of the most important factor in investor's decision making, the test of the association between risk relevance of accounting fundamentals and the cost of equity, also provided insight to market participants. To calculate the cost of equity capital, we used the Gordon model. Also, to test hypothesis, regression method has been employed for pooled cross-section data. The sample included listed companies in Tehran Stock Exchange along the period 1999–2008. Research results showed the association between the cost of equity capital and some accounting-based risk variables was significant, and thereby supporting the usefulness of fundamental analysis to determine the risk factors.