ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Earnings Downside Risk and Cost of Debt Capital

  • Sungmin Jeon Chonnam National University
  • Sang Hyuk Lee Hansung University

Asian Tax Journal Vol. 26 No. 5 (2025), pp. 63-87

Abstract

This study examines the association of accounting－based earnings downside risk (EDR) and firms’ cost of debt capital. Unlike traditional risk measures that assume a symmetric distribution of earnings, EDR focuses on the likelihood of downside losses, thereby offering a more realistic reflection of investors’ risk perceptions. Creditors, in particular, are exposed only to downside risk, as they do not benefit from upside gains but bear losses when firms fail to meet their interest and principal obligations. Accordingly, this study investigates whether EDR derived from accounting earnings serves as a useful indicator for creditors in assessing firm risk. Using a sample of listed Korean firms from 2017 to 2021, the results show that firms with higher EDR face significantly higher costs of debt capital. This association is especially pronounced in the KOSDAQ market, where information asymmetry is more severe, suggesting that EDR provides valuable risk signals to creditors in poor information environments. The findings highlight the relevance of accounting－based risk measures in the debt market and extend the role of accounting information.

Keywords

  • Earnings downside risk
  • Cost of debt capital
  • Information asymmetry

Related Articles

ATJ
E-SubmissionSitemapContact Us RSS

Asian Tax Journal

Address : 3F, KICPA Bldg., 12 Chungjeongro 7-gil, Seodaemun-gu, Seoul 03736, Republic of Korea

Editor-in-Chief : Prof. Wanyong Kim Editorial Office : Dept. of Finance, Accounting & Taxation, Hanyang Cyber University, 220 Wangsimni-ro, Seongdong-gu, Seoul, Republic of Korea Tel : +82-2-2290-0418 / +82-10-8664-1117 E-mail : taxresearch2@hanmail.net