Abstract
AbstractEmpirical studies found that earnings management (EM) explains firms’ cost of capital both in companies in emerging and developed countries, but until now, it has not been analyzed whether the effect of EM on the financial cost is different among emerging countries inside or outside an economic area (Eurozone). Our results show that the cost of debt and the idiosyncratic component of the cost of equity are related to discretionary accruals and abnormal values of operating cash‐flows, that the emerging country effect is more relevant on the cost of debt, that there is a Eurozone effect that makes discretionary accruals more relevant than abnormal values of operating cash‐flow and that firms in emerging countries inside the Eurozone benefit from a lower EM penalty on the cost of debt than firms in other emerging European countries.
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